Governing boards in the for-profit and nonprofit contexts share many legal precepts: the oversight role, the decision-making power, their place in the organizational structure, and their members’ fiduciary duties. But in the nonprofit setting, misconceptions about corporate governance abound. Are board members primarily fundraisers? Cheerleaders? A rubber stamp to legitimize the actions and decisions of the executives? Do they run the organization to the extent staff is unable? Are they window-dressing to spruce up the organization’s letterhead? If they are rich or famous, must they attend board meetings? How do they know whether they are doing a good job, or when it is time to go? Despite the common ancestry and legal underpinnings, nonprofit corporate governance places heightened demands on trustees: a larger mix of stakeholders, a more complex economic model, and a lack of external accountability. This post explores how substituting a charitable purpose for shareholders’ interests affects the board’s role.
In organizations of all kinds, good governance starts with the board of directors. The board’s role and legal obligation is to oversee the administration (management) of the organization and ensure that the organization fulfills its mission. Good board members monitor, guide, and enable good management; they do not do it themselves. The board generally has decision-making powers regarding matters of policy, direction, strategy, and governance of the organization.
The board of a well-governed nonprofit organization, like the board of a well-governed profit-making company, will do all of the following:
- Formulate key corporate policies and strategic goals, focusing both on near-term and longer-term challenges and opportunities.
- Authorize major transactions or other actions.
- Oversee matters critical to the health of the organization— not decisions or approvals about specific matters, which is management’s role—but instead those involving fundamental matters such as the viability of its business model, the integrity of its internal systems and controls, and the accuracy of its financial statements.
- Evaluate and help manage risk.
- Steward the resources of the organization for the longer run, not just by carefully reviewing annual budgets and evaluating operations but also by encouraging foresight through several budget cycles, considering investments in light of future evolution, and planning for future capital needs.
- Mentor senior management, provide resources, advice and introductions to help facilitate operations.
Similar to for-profit corporations, the power to control and oversee the management of the affairs and concerns of a nonprofit corporation is set forth in its corporate charter. Generally speaking, state law permits both kinds of corporations to self-direct significant allocations of power and responsibility, and then requires them to follow their own corporate governance and operational policies. The familiar fiduciary duties of care, loyalty, and – sometimes – obedience, undergird these requirements in both sectors.
In a well-governed organization of either the for-profit or nonprofit kind, the board does not permit executives to run and dominate board meetings, set agendas, or determine what information will be provided to board members. Under the leadership of an active and functioning board chair, there is adequate opportunity at board meetings for members to receive and discuss reports from not only the chief executive, but also, as appropriate, directly from other executives, in-house and outside professionals, and independent consultants if necessary. Time should be reserved for executive sessions, at which management should be excluded so that its performance may be fully and freely discussed.
Mission is what distinguishes nonprofits from their for-profit cousins: Nonprofits have missions instead of owners or shareholders. While the prime directive for board members of for-profit organizations is to ensure the highest possible value for owners, by contrast, nonprofit board members’ prime directive is mission fulfillment.
Board independence and board attention are of paramount importance in good nonprofit governance. The independence of the board is key because of the non-distribution constraint – nonprofits exist to serve the public interest, not to benefit owners or other private parties. Business or family relationships between the organization or its executives and a board member or her firm are frowned upon and should be strictly scrutinized under a conflict of interest policy administered by independent directors. Even absent outright business or family relationships, a common shortcoming of nonprofit boards is that they are too small, too insular, or too deferential to the founder or chief executive.
Another frequent error of nonprofit boards is inviting new members because of their marquee name within a certain field of endeavor (e.g., a famous dancer on the board of a dance organization) or their means and inclination to donate, without due consideration to the person’s ability and availability to fulfill fiduciary duties, providing the critical oversight function. The governing body of a nonprofit must be made up entirely of people in a position to govern it—setting the strategic direction of the organization and overseeing management’s execution of the mission. Wealthy or prominent persons— donors, artists, scientists, public officials, and others—with an interest in the organization’s program but lacking the time, availability, or expertise to provide meaningful oversight may serve the organization in a non-fiduciary capacity, such as an honorary or advisory board, donors’ circle, or professional council.
Governance is more complex in charitable nonprofits for a number of reasons. Public charities (501(c)(3) organizations) are intended to serve a public purpose, and the board must bear in mind that broad interest. Depending on its mission, history, and geographic reach, a nonprofit may also have specific stakeholders or different groups of stakeholders, some or all of whom may be represented by categories of board members under the organization’s by-laws. The interests of the organization’s ultimate clients, who may be indigent or otherwise disadvantaged, are another important consideration. The organization’s management and workforce may be paid less than their for-profit peers for similar work – if at all – further complicating the board’s oversight duties. In addition, nonprofit trustees may feel role-strain – or worse – because of real or perceived obligations to interact with, attract – or even be – charitable donors. These additional factors make nonprofit board decision-making arguably a much more complex process than the straightforward mandate of maximizing return.
Moreover, nonprofits’ economic models may be more complex than for-profits’ models, including a dynamic blend of earned revenue (ticket sales for a symphony, fee-for-service billings by a hospital, tuition payments to a university) and contributed income (annual fundraisers, “Friends of” membership groups, end-of-year solicitations, capital campaigns). Wealthier nonprofits with endowments can also count on a stream of revenues from investments. In harsh economic climates, however, there is a high correlation between reduced contributions and weaker investment returns. Compounding the difficulty, hard times on the revenue side often coincide with heightened demand for organizations’ services, particularly social services, increasing expenses and creating cash crunches, trouble balancing budgets, or even persistent deficits. Savvy nonprofits have added “third streams” of revenue to supplement and diversify traditional two sources. Entrepreneurial initiatives may include leveraging real estate or other assets, monetizing treasure troves of intellectual property know-how, or engaging in joint ventures with fellow nonprofits or even commercial entities. In envisioning and evaluating such enterprises, board and management must observe regulatory requirements and consider tax implications. In lean years and in growth years, the board must be deeply engaged in overseeing the organization’s investments, its other sources of revenue and expense, and the planning of new initiatives.
What happens when board members fail? In theory, the mechanism in a for-profit corporation for correcting errant board members is straightforward: if the investors don’t like what the directors are doing, they vote them out of office. But in the absence of investors, nonprofit boards must be self-correcting. No one has ever made a tender offer because a nonprofit was inefficient. Moreover, governmental agencies regulating the sector tend to be small and under-resourced, making it highly unlikely that any but the most obvious misconduct will be detected and corrected from the outside. Unless board members are doing something illegal or are term-limited out of office, they may serve in perpetuity, giving them ultimate power over the organization. In this regard, nonprofit trusteeship is a unique and privileged role.
By a number of measures, nonprofit and for-profit board governance are similar: the board’s oversight role, its decision-making power, its structural place within the organization, and its members’ legal duties. The similarities end, however, where shareholder interest in maximizing returns gives way to mission fulfillment, a multiplicity of stakeholders, more complex business models, and self-accountability rather than external accountability.
I work at a major environmental NGO. I am well compensated, but I can’t help but think my colleagues and others in the sector (I did not always used to be so well compensated) would benefit from Unionization.
What unions exist for non-profit employees? How could we make more?
Signed, In Solidarity
It does you credit that you remain concerned about the poorly-paid even after you’ve left their number. But the question you raise can only be answered with a frustrating, “It depends.”
Individual circumstances dictate whether any particular nonprofit would benefit from a union. Certainly nonprofit employees are a resource for unions looking to grow—our institutions are rooted in the community and therefore unlikely to pick up and move to Dixie (or China) when the union comes to call. But whether unions are a resource for nonprofit employees looking to grow is a separate question.
If the morale at an agency is poor, and a significant component of that morale is poor wages, hours, benefits and working conditions, then talking union only makes sense. But if morale is poor because the Executive Director is a dingbat, then unionizing is pretty much beside the point. And if morale at an agency is high, then there’s unlikely to be much support for the idea of bringing in a third party to mediate between the working and the worked-for—particularly as the organizing process can be so disruptive and embittering. That’s not a rap on the unions: you’re going to have disruption in any context requiring the taking of sides, whether the subject is program expansion or relocation or mission creep—or union representation.
The issue is certainly not that there aren’t enough unions organizing in the sector, though they may not be organizing enough. The Service Employees International Union, the American Federation of Teachers, the Association of Federal, State, County and Municipal Employees and even the Teamsters have taken their turns organizing nonprofits, often following jobs government agencies have chosen to outsource. (See the Nonprofiteer’s earlier discussion of the “progress” from government employees [unionized] to nonprofit employees [non-union, at least at first] to faith-based employees [presumably too holy to strike].) So we don’t need to “make more” unions; we need to encourage more nonprofits to adopt either significant improvements to compensation, benefits and work rules or a relationship with a union designed to provide those significant improvements.
If you can get from a nonprofit Board of Directors the improvement in wages and working conditions you want, there’s no need to go union. But those Boards of Directors are apt to be resistant to your demands, because they regard it as their fiduciary duty to direct money to programs rather than to the salaries of the people who run those programs. (If this strikes you as a distinction without a difference, you’re completely correct—but you’re also obviously unfamiliar with the rhetoric of charities and their funders.) Or they might resist your demands just because they’re lazy and don’t want to raise money.
In either case of resistance, having a union organizer in your back pocket (or at least on speed dial) may be what’s necessary to get the Board’s genuine attention. Just as the prospect of being hanged concentrates a man’s mind wonderfully, so the prospect of being unionized concentrates the minds of charity Boards.
(A rigorous research paper on the subject reported that nonprofit organizing drives succeed more often than those at for-profits. But does that mean that nonprofit employees’ sense of social justice makes them/us more receptive to unions, or just that unions don’t bother to organize at nonprofits til they can see it’s going to be a slam-dunk?)
The Nonprofiteer always snorts when she hears employers talk about how it would be a shame to insert a stranger between them and their employees, who are just like family. Especially at nonprofits, if a workplace is like a family, it’s generally like the family in Long Day’s Journey Into Night. But small and medium-sized nonprofits do have a uniquely porous relationship between management and labor, as well as between management and governance; and a union, or even a failed organizing drive, will disrupt that once and for all.
Thus, unions make the most sense at the largest nonprofits (the hospitals and universities), which are practically indistinguishable from for-profits. At smaller agencies they may make sense, but only if employees are already up in arms, and only if there’s blood left in the turnip.
Oh, and only if fresh employees will be hard to find. It’s illegal to fire someone for union organizing but you can be made uncomfortable enough to quit, and that may be a higher price than you’re willing to pay to make sure your fellows can send their children to college. Or perhaps not.
See Talkin’ Union
I was hoping you might be willing to follow up on your last post on your blog because I felt it was incredibly powerful. I hope it is being reblogged and reposted as much as it should.
What does a professional do when they see a job that sounds amazing but the salary is lowballed? Do you address it in a cover letter, if they gave an insultingly low number outright in the job description? What about when it sounds great and you get an interview and they make an offer and it is $15K less than what’s in line with the position? I know anyone can just simply decline, which I’ve done myself.
But I feel like leaders in the sector have a duty to say something, to help move towards realigning expectations of founders and staff who offer insultingly low pay, especially for organizations that offer critical services that honestly won’t select themselves out of the sector. What are your thoughts on this?
It doesn’t seem like we’re at a transparency point in the sector where we can say, “If you want the best candidate for the position you have to pay competitive wages, if you want the fourth or fifth best or most desperate candidate, you can get away with what you’re offering.”
Of course, I feel particularly stung after two painful lowball offers in the past four months that I’ve had to turn down, but that’s sort of beside the point. I never realized that this was such a pervasive problem. It seems especially bad in Chicago, for whatever reason, compared with my compatriots in DC, SF, and Seattle.
Sincerely, Looking at the Bigger Picture
The Nonprofiteer understands there to be two parts to your question. The first is, “What is a professional to do when faced with an unacceptably low salary offer?” The answer to this is that you have nothing to lose (but your chains) by responding—in person or in writing—”I realize you may not be as familiar with the nonprofit job market as I am, given that your agency only looks for an Executive Director once every many years; but the amount you’re offering isn’t suitable to the position you’ve described. The range is more like [and then cite the minimum you'd accept and the maximum you can really envision].” There are only two possible answers to this: “Well, we don’t have that kind of money and don’t intend to get it,” in which case you know you’re dealing with a Board of Directors you wouldn’t be able to manage anyway; or “Oh, really? Well, is there any way we can make this work?” in which case you’re suddenly negotiating.
There’s no need to say, or even think, that an offer is insulting: if you can’t assume good faith on the part of agencies, at least recall that they derive no benefit from insulting prospective employees. Though it feels otherwise, no one is commenting on your qualifications by offering you a low salary. They’re simply hoping they can get someone great for cheap, which if you think about it is the entire nonprofit model. So consider yourself someone whose first task is to educate your prospective employer about how things ought to work. Again, if the employer is uninterested in that education, good riddance to bad rubbish; whereas if it’s interested, you may actually be able to get to ‘yes.’
But your second question is of much broader application: What would it take for the sector to begin to offer wages that are appropriate to the skill level being sought? And the answer to that, as to most questions about how to fix nonprofits, is ‘more money and more understanding from big institutional funders.’ As long as foundations and social venture capitalists pound the drum for a strict ceiling on administrative expenses, nonprofits will continue to skimp on paying for talent. The people with money are the thought leaders in the sector (isn’t that always the way?), and they’ve made it acceptable to answer reasonable salary demands with the enraging, “Well, no one goes into nonprofit work to get rich.”
Take a look at Watkins Uiberall’s excellent comparative compensation survey from 2010. Though it’s from Tennessee and from two years ago, it will provide a basis for conversation about what’s appropriate for many jobs in the sector. As data like these are spread (including by prospective employees), employers will come to understand the way things really work, vs. their fantasy of hiring President Obama for a community organizer’s stipend.
Nonprofit Boards, meanwhile, should consider the non-trivial possibility that shorting their employees on salary and benefits will ultimately lead to a unionization drive. The Nonprofiteer is a union girl herself, but most Boards of Directors and nonprofit managers don’t agree. So somewhere in any conversation about salaries one might gently slide in the question, “If your pay scale is so low, how do you avoid the unions?” You won’t get an answer but you’ll be providing food for thought, and the longer employers chew on it the less chintzy they’ll be.
An op-ed piece a few weeks ago in the Wall Street Journal (behind a paywall) argued that donors should construct their foundations to spend down assets as rapidly as possible, lest the foundations end up supporting causes their donors would revile. This familiar argument comes with a familiar whipping-boy: the Ford Foundation, whose enthusiasm for assisting the poor and marginalized was certainly not shared by its eponymous founder Henry. The op-ed piece, like many of its kind, focuses on the question of donor intent, arguing that only a brief payout period can assure that the donor’s intent is served.
The Nonprofiteer has never cared particularly about the intent of dead donors. First of all, they’re dead, and while death may not extinguish intent as a matter of law it certainly does as a matter of common sense. Second, how much better off do we really think the world would be if Ford’s foundation had spent all its money on Ford’s enthusiasms, such as promoting publication of the scurrilous anti-Semitic tract The Learned Protocols of the Elders of Zion? Third and most important, the tax-free status of foundations is supposed to encourage philanthropy, not the accumulation of permanently idle tax-free money.
The Nonprofiteer has long argued that the minimum expenditure required of foundations is way too minimum, and that setting up a structure to give away 5% of income shouldn’t entitle a donor to a 100% tax shelter–whatever his/her intent. Most likely that intent was to escape from taxation, without too much more thought than that.
So let’s think about the issue not from the standpoint of donor intent but from the standpoint of social good. Which is more useful for a philanthropy: remaining around in perpetuity, to grapple with issues that may arise a generation or three from now, or spending down in the present and relatively short-term future on issues the donor understands and cares about and which in any case are currently urgent? From the phrasing you can tell the Nonprofiteer’s position: spend it down.
Julius Rosenwald saw the wisdom of this approach when he created a program of fellowships for African-American artists for their professional development. Rather than keep the fellowships around in perpetuity, he ordered that the principal be awarded completely within 5 years of his death. As a result, virtually every mid-20th-Century African-American artist you’ve ever heard of received a Rosenwald Fellowship: Ralph Ellison and Romare Beardon and Katherine Dunham and Gordon Parks and many others. The value of what Rosenwald did, giving artists enough money so they could work without fear or distraction, is literally incalculable.
But also as a result, virtually no one remembers Julius Rosenwald, or at least not his fellowship program. So that presents the question: are we in the business of fostering greatness, or memorializing it? Is remembering a donor as important as creating work through a donor’s generosity? Again, to the Nonprofiteer the answer is self-evident. She’d rather be grateful for Ralph Ellison than to Julius Rosenwald.
Look, here’s the deal: people will make money in every generation, and in every generation some people will make a lot of money. If we tax them properly they’ll look for the opportunity to shelter their money in philanthropy. Why shouldn’t we tax them so that they’re motivated to spend it philanthropically, too? Like the proverbial Fifth Avenue bus, another chunk of money will be along any minute.
Sure, there’s a risk of spending too rapidly and with insufficient research (or “due diligence,” as people are fond of saying when they want to pretend that the nonprofit sector is really just like a business). But the greater risk is the situation in which we find ourselves now, where philanthropies give out amounts insufficient to make any significant change. No, philanthropy isn’t supposed to be society’s primary source of support, but while people are busy starving government so they can drown it in the bathtub, private wealth can and should step into the breach.
Consider the contributions of the Gates Foundations to the Global Fund to Fight AIDS, TB and Malaria. Can anyone really argue it would be better to hold back on eradicating those diseases, in case there’s some bigger plague later on? If there is, as AIDS itself demonstrates, we’ll mobilize and raise money for it. Meanwhile, in case of every ailment, time is our enemy: the later we provide resources, the harder it will be for those resources to have impact. Thus wasting money is a less significant risk than failing to spend enough to make a difference.
Two things need to happen: philanthropists themselves need to organize their giving so that it ends within a reasonable time after their death, and Congress needs to modify the tax code to require philanthropies to pay out more each year to retain their tax-favored status. A 10% annual payout–double the current rate–may end up causing philanthropies to dip into principal, maybe even until they’re empty. But remember the words of Citizen Kane as he contemplated the financial difficulties of his newspaper empire: ” I did lose a million dollars last year. I expect to lose a million dollars this year. I expect to lose a million dollars *next* year. You know, Mr. Thatcher, at the rate of a million dollars a year, I’ll have to close this place in… 60 years. “ Let’s take a Kane-like risk of running out of money.
One more story: Some time in the ’90s Joan Kroc stood up at a Ronald McDonald House benefit to announce her annual gift. Rumor had it she was actually going to make a five-year pledge, and the Nonprofiteer’s table indulged in the parlor game of trying to figure out just how much that would be. We figured the previous year’s gift ($5M) plus a little bump (so $6M) for each of 5 years, and settled on $30 million. And then she rose to speak, a little woman holding a torn-off piece of yellow legal paper in her hand. And she said, “I was going to make a 5-year gift, but then I thought: ‘The need is now.’ So tonight I’m giving $50 million to Ronald McDonald Children’s Charities.” Everyone at the table fell back in her seat, literally knocked over by her generosity, and also by her insight: The need is now.
Aside from Ronald McDonald, Mrs. Kroc mostly supported causes her late husband disapproved of. If only he’d given more in the present, he wouldn’t have had to contemplate a future in which his money went to places he despised. So the donor’s intention and the sector’s need are in sync:
Spend it now.
- An executive director position listed for $32K/year. Granted this was described as a half time gig but is there any such thing as a half time ED? Maybe it means you can take weekends off. The job description/requirements were just as detailed as any full time description.
- A director of development position for $20-25K. Again this is listed as 3/4 time. It comes with a very detailed laundry list of expectations but again is this really a job that can be done well with less than full attention?
Something seems really off here. My gut (and review of their 990′s) tells me that these are marginal organizations to be avoided. Do I seem unrealistically fussy in today’s job market?
Signed, Born At Night But Not Last Night
You are not unrealistically fussy, especially when “today’s job market” in the nonprofit sector seems to include a number of jobs that are going begging for want of the right candidate. And you’ve put your finger on why that should be the case: because the job descriptions (and presumably the jobs that accompany them) are a pile of unrealistic expectations held together with the glue of employer entitlement. This glue is particularly thick in the nonprofit sector, where hiring managers presume that their poverty entitles them to your services for less than they’re worth. But, as the workplace sign has it, Bad planning on your part doesn’t necessarily constitute an emergency on my part.
And you’ve identified a favorite gambit of those self-entitled managers/agencies: pretending that a full-time job can be done part-time because they know the proposed salary is an insult. (For what it’s worth, the Nonprofiteer was paid $25K as an Executive Director of a small organization in 1987; if salaries haven’t increased 20% in the past 25 years, they should have!) As you say, it is virtually impossible for anyone to be a part-time Executive Director, and the length of the list of responsibilities demonstrates that the agency knows this as well as you do. You could do it simply by specifying the number of hours you’re prepared to work (e.g., 30), but sure as death and taxes would come a grant application deadline which must be met, and your self-imposed part-time-ness (part-time-itude?) would go out the window.
The Nonprofiteer just had occasion to help a client work on a job description for a part-time professional position. The original description had two problems. First, it specified more than 40 hours’ worth of work for a 20-hour position. Second, its qualifications included both items that couldn’t be expected from someone willing to work part-time for $20 an hour (such as a roster of contacts in high-profile media) and items that shouldn’t be expected from a professional (such as facility with word processing programs). If you’re hiring a professional, don’t ask for secretarial skills. And if you’re hiring a professional, be reasonable about how much professional service you can get for $20 an hour and/or 20 hours per week.
By contrast, another client has recently shifted its budgeting from “How much can we spend based on how much we raised last year?” to “How much do we need to raise to support what we need to do?” Moreover, one of the things the agency realized it needed to do was steadily increase the salary of the Executive Director so that when the current martyr departs, the group will be in a position to offer a living wage to the next group of candidates.
(Consider, by the way, that the people offering such meager salaries are Board members who probably chafe at being asked to give $1000 a year. They don’t hesitate, though, to ask you to forego $25,000 or so of income. This is why the Nonprofiteer doesn’t advocate asking staff members to donate to their agencies: they’re already doing so at a level no other donor is likely to match.)
(Consider also that the sums offered make clear that the agencies are expecting women, and only women, to apply for these jobs. No one would dare offer such a pittance to a man. The nonprofit sector operated for years on the unwaged labor of women, but there’s no reason we have to continue to provide this subsidy.)
Thus, your incredulity at the nerve of some agencies is perfectly well-founded. That won’t help you get a job with them: but hey, why would you want to? You’re a star, and you’ll find a place that won’t also ask for the moon.*
“Oh Jerry, don’t let’s ask for the moon. We have the stars.”–Bette Davis to Paul Henreid, Now Voyager
When Warren Buffett challenged Mitch McConnell to help him pay down the deficit, McConnell paid him no never-mind—but a teenage girl in Northbrook, IL heard and responded, sending $300 to the Feds and asking Buffett to do the same. This is an adorable story, and the video makes it more adorable still.
But let’s not let this young woman’s sense of civic duty and remarkable act of civic participation distract from the real point of the Buffett challenge, which is that without increased taxation of the wealthy, jerks like Mitch McConnell will free-ride on public-spirited souls like Katie Murphy.