Nonprofit governance

QUESTION:

In this age of increased oversight, what are three ways nonprofits can improve their governance?

ANSWER:

The legal standard for board governance remains unchanged and generally is the same as for for-profit boards.

What has changed is recognition of the nonprofit sector’s history and acceptance of poor governance practices.

Efforts to regulate the sector will continue until its culture and groups establish and reward good governance norms, practices and procedures.

Governance will require increasing commitment of time, resources, and expertise.

* Establish a governance culture of accountability.

Nonprofit boards must change their own individual board culture by placing good governance practices and procedures front and center.

Boards must “walk their talk” by insisting upon accountability from their members’ actions.

Board members who are absent or passive or lack substantive knowledge about their group’s operations should no longer serve as members of the governing board.

* Establish a governance culture of organizational performance.

Peter Drucker says “performance is the ultimate test of an institution” because nonprofit organizations exist to change the world.

A governance culture of organizational performance focuses a board’s ability to lead.

Clear performance measures establish a learning organization, and the board’s work becomes more defined within the critical space between anticipated results and actual performance.

Measures of a group’s stakeholders, internal operations, and human and informational needs should complement, if not supplant, traditional reliance upon financial measures.

* Establish a governance culture of investment

A governance culture of investment encourages others to fund an entity’s mission rather relying primarily upon traditional concepts of charity.

Increasing transparency and timely information will inform investors with regard for two traditional concerns.

First, overhead is not an inherently bad thing and external guidelines about “appropriate levels” are often inappropriate measures of efficiency or effectiveness.

Overhead consists primarily of the nonprofit staff and, more importantly, their knowledge.

It is the application of their embedded and collective capacity to learn and adapt that enables the nonprofit to fulfill its mission.

Second, investor efforts to micromanage through program fund accounting requirements often have adverse impacts.

This is especially true among smaller nonprofits that often are ill equipped to handle them, and for which this type of investment is often short-term.

A culture that establishes, enforces and communicates a focus on results should attract and maintain long-term investment, enabling the well-led organization to meet its mission.

Investors should invest in the nonprofit and then let the nonprofit decide how best to allocate resources.

Reward those that meet these results with increased and ongoing investment.

If a nonprofit is not able to meet the defined results, then move investments elsewhere.

— Compiled by Caroline Monday


Marty Martin of the Martin Law Firm in Raleigh, N.C., provides legal counsel and consulting services to nonprofit, private and public-sector organizations.

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