Address the three weak categories that often affect board performance

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Eugene Fram

Boards of Directors, like people, have areas of strengths and weaknesses. In a recent New York Times article, Gretchen Morgenson discusses the weak categories of performance in the boards of public companies.

How do nonprofit boards score in these three major categories?

1. Risk Management 

I think that most persons associated with nonprofit boards will agree that nonprofit boards are risk adverse. The rationale is that their budgets are derived from public or donated dollars. However, do boards occasionally seek grants that can enable them to ask outside sources (individuals or foundations) to assist with these more risky projects? 

For example, I recently encountered a nonprofit that has an internally developed product that could have some modest profitable commercial value. It will require a small financial investment that might be derived from an individual or foundation, and a volunteer to champion the product marketing. In my opinion, nonprofit boards need to seek these types of ventures in the current tight budget environment.

Few nonprofit boards have ad hoc or standing risk committees or even employ occasional risk management advisers. Each board should have a good understanding of the risks that it faces. Then where appropriate, purchase insurance to reduce the risk liabilities.

2. CEO Succession Planning

FPs are not noted for CEO succession planning, as noted by JC Penney’s lack of planning when the board had to terminate its former president, Ron Johnson. Similarly, NFP boards are not noted for prowess in this arena. For example, a Google search of “CEO Succession Planning for Nonprofits” did not yield a single reference.

The Morgenson article cited above reports, “Hiring an outside C.E.O. costs between three and five times the amount it does to promote an existing manager.” For nonprofit organizations under budget stress, this fact can be a positive or negative factor in hiring. Positively it can force some organizations to consider all strong internal candidates. Negatively, it may allow the additional costs of engaging an outside candidate to overshadow the review of candidates. Consequently the organization may engage an internal person with less management potential.

Also, within six months of hiring a new CEO a nonprofit should have a succession plan in place in the event that the CEO is temporarily incapacitated.

3. Pay for Short-Term Performance? Many nonprofits review executive compensation annually. But the impact of NFP programs and efforts may not be known for longer periods of time. Would it be desirable to structure some CEOs a deferred compensation plan dependent on measuring long-term impact? Would such a change provide more executive motivation in a nonprofit setting? 

Measuring qualitative impacts also are important, but require using imperfect metrics over time to obtain a robust picture. Change is difficult for nonprofits. But in the 21st century, some tangible experimentation should take place to consider these options.

Eugene Fram is the author of “Policy vs. Paper Clips: How Using the Corporate Models Makes a Nonprofit Board More Efficient & Effective.” This post first ran on his website, Nonprofit Management. 

When is the Right Time to Change a Nonprofit’s Bylaws?

Eugene Fram

In listening to a recent Nonprofit Quarterly webinar, I was again reminded that the habit or long standing culture could hinder the capacity building function of a nonprofit organization. One example cited was the tendency of nonprofits to procrastinate in a review of their corporate bylaws. Original board standing committee structures and board/management relationships remain in place long after they are needed to drive mission growth and to improve client services and impacts.

Two bylaw changes that many nonprofits fail to revise on a timely basis are first the reduction in the number of board standing committees e.g., building, personnel, marketing and nominations. Modern board-staff task forces or ad hoc committees can effectively expedite policy or strategic decisions in these important areas. Only three to five board-standing committees are needed to meet 21st century requirements. 

The second consideration for bylaw change calls for a new look at the position of Executive Director and the possibility of expanding the scope of his/her responsibilities. This reduces the potential for board micromanagement and facilitates the transition from ED status to President/CEO, which, for many nonprofit organizations has resulted in increased efficiency and better mission focus.

Following are the types of outcomes or behaviors that signal a change in bylaws needs to be considered. Any one, several or all of the items can be a clarion call for bylaw revision.

● When annual budgets exceed $1 million dollars and/or full time staffs exceed 10 professionals – This guideline will vary greatly, based on the type of nonprofit. For example, trade associations with multimillion-dollar budgets may only employ five or six full time staff.

● Board agendas becomes crowded with minutiae – Examples: discussion of annual dinner menus, detailed technical reports of operations, meeting time used to develop promotional copy, and reviews of slide presentations.

● Director turnover is much too frequent – Directors need to feel they are making meaningful contributions, and those who become bored with lengthy reports and routine discussions rarely reveal the true reasons for resignations. (Increased job or family requirements often are a “cover story” for leaving.) Also, candidates for board seats will respond more positively to an invitation to become a director if they perceive the board’s focus is on meaningful activities.

● Failure to hire better managers – If too many desirable management job candidates are rejecting offers, it may be a sign that the organization is not being recognized as being a viable one for the 21st century. Funders and volunteers also may be turned away if they perceive the board is micromanaging the organization and operational management is weak.

● The CEO is expected to be a fundraising partner with board directors – This type of partnership is becoming the norm. Consequently, having an operational chief executive officer who has the President/CEO title can provide an external perception of being a manager having the directors’ confidence. During fundraising efforts, a new donor encountering an ED title can be confused as to the person’s management responsibilities. On one hand, it can describe a person who is a glorified administrative assistant, or on the other hand, it can describe a senior health care manager with a significant budget and a hundred employees. In terms of business or donor relationships, the title change clears the confusion and allows the chief executive to interact with external business executives and donors on a senior level basis. More professional and experienced chief executives will require this title to assume the top operational position.

Eugene Fram is the author of “Policy vs. Paper Clips: How Using the Corporate Models Makes a Nonprofit Board More Efficient & Effective.” This post first ran on his website, Nonprofit Management.