The Non-Profit Board's Role in Governance

An Overview

Governance refers to the processes and structure used to direct and manage an organization's operations and activities. It defines the division of power, and establishes mechanisms needed to achieve accountability between stakeholders, the board of directors, and management.

Good governance systems help organizations focus on the activities that contribute most to their overall objectives: to utilize their resources effectively and ensure they are managed in the best interests of their principal stakeholders.

THE NOT-FOR-PROFIT BOARD

Each group involved in a non-profit organization - its board, management, staff, volunteers, donors and others - plays a part in its governance system. However, the board's role is clearly the central one. Understanding the board, and its often complex relationships with the other key groups in the organization, such as the management team, is not always easy.

The non-profit board is the body which bears the ultimate responsibility for the organization. This responsibility is the same in either the non-profit or corporate sectors. In fact, a report on corporate governance prepared by the Toronto Stock Exchange rightly characterizes this responsibility as the board's stewardship role. “By stewardship we mean the responsibility of the board to oversee the conduct of the business and to supervise management which is responsible for the day-to-day conduct of the business.”

THE ROLE OF NON-PROFIT BOARDS:
SIMILAR BUT NOT THE SAME

Currently in not-for-profit organizations, the board of directors and its role, structures and processes are not always clearly understood. In part, this is because non-profit boards are structured in a wide variety of different ways – they may be solely concerned with policy, or they may more concerned with direct operations.

In general, the key factors in understanding non-profit board governance include:

  1. Board members are volunteers, and often serve for relatively short periods; as a result, the average board experiences more frequent turnover than its corporate counterpart.
  2. Individual board members also tend to reflect a wide variety of experiences and have differing expectations of their board role. For example, many boards include:
  • users of the non-profit organization's services, or people have worked with the organization as a volunteer (these people are often most comfortable when acting in an operational role, such as fundraising or managing a key activity)
  • prominent members of the community (who may believe their role on the board is simply to lend it their good name), and
  • people experienced in serving on corporate boards (who often consider an non-profit board's role as more restricted than a corporate board, and therefore not requiring them to exercise the same degree of rigor or discipline).

In profit-oriented organizations, the board's minimum responsibilities are established by statute, regulation and case law. The board is ultimately responsible for the organization, despite the fact that it usually delegates the authority for running the organization to an executive director/CEO. Beyond the minimum responsibilities, the board should also consider broader responsibilities in other key areas, such as health and safety or environmental practices. They need to understand their legal responsibilities, and then determine if, and how far, they should move beyond the "letter of the law" in taking on a greater responsibility and accountability to stakeholders.

PRIMARY RESPONSIBILITIES IN NON-PROFIT STEWARDSHIP

The board's primary role is to oversee management and ensure that the non-profit organization's affairs are being conducted in a way which achieves the organization's strategic objectives.

Many non-profit boards have responsibility for:

  • Ensuring good governance is in place;
  • Developing and maintaining a long-term perspective;
  • Ensuring sound performance:
  • Ensuring financial health; and
  • Ensuring sound relationships.

GOOD GOVERNANCE

The board is responsible of the highest level of decision-making and legal authority in an organization. By law, it is ultimately accountable for, and has authority over, the organization’s resources and activities. The board articulates and communicates the organization’s vision to the membership and the community. Through policy, the board defines the parameters within which the organization will carry out its work.

As a steward of the organization, each board members should be aware and understand the organization’s constitution, its bylaws, and mandate. The board should help set the organization’s vision, mission and values – and ensure the organization has a direction into the future.

LONG-TERM PLANNING

The board ultimately carries the responsibility for strategic planning in the organization. This responsibility can be delegated to paid staff – but often, in organizations with few paid staff members, strategic planning is conducted by the board, or a volunteer committee.

If the board does not undertake to develop the plan, it must still satisfy itself that management has implemented an appropriate strategic planning process. The board's role is to provide an independent challenge of management's key assumptions, and assess whether management's strategy is reasonable in relation to the risks involved, the resources required and benefits to be achieved.

In short, the board approves the strategy, but does not create the strategic plan itself. To be able to effectively evaluate management's strategies, board members need to have a clear understanding of the role and purpose of the non-profit organization as a whole.

SOUND PERFORMANCE INCLUDES:
RISK IDENTIFICATION AND MANAGEMENT

Every organization faces a variety of potential risks, such as the loss of key staff, withdrawal of funding support, and disruptions in the investment market which undermine the non-profit organization’s financial assets. Each could seriously damage the organization’s reputation, resources or ability to operate. The board's responsibility is to ensure that management has implemented an effective process to identify, minimize where possible, monitor and manage the potential risks.

INTERNAL CONTROL AND FINANCIAL HEALTH

Non-profit organizations today require controls and information systems which enable the organization to evaluate operational effectiveness and efficiency, compliance with laws and regulations, and the reliability of management and financial information. Some specific needs for most non-profits include controls over invested funds, confidentiality of donor information, and required source withholdings from employee pay cheques. The board is responsible for ensuring that management has implemented effective internal control systems to protect the organization, and the necessary management information systems to assess the non-profit's performance and progress in meeting its objectives.

SOUND RELATIONSHIPS INCLUDE:

MANAGEMENT EFFECTIVENESS AND SUCCESSION

Since the board delegates the task of running the non-profit organization to management, it is the board's responsibility to ensure that the right management team is in place. The board's role is to question, scrutinize and actively monitor management. Board members should have the opportunity to constructively question, test and challenge management's views and proposals. The board should also be active in appointing the CEO/Executive Director, monitoring his or her performance against specified goals, and setting the remuneration level.

INTEGRITY OF THE ORGANIZATION

Good governance is more likely to thrive within organization with strong ethical and behavioral attributes, such as open communication, commitment to the organization, accountability for actions and results, integrity and respect for individual’s right sand privacy. Integrity is often found in a code of ethics, values or principles of an organization.

BOARDS WITH OPERATIONAL RESPONSIBILITIES

In many non-profit organizations, individual board members take on operational tasks, such as fundraising, or serve in a management capacity (for example, a board member who is a qualified accountant or banker may serve as the organization's treasurer or, a graphic designer may help to update the organization’s web site.)

Although these duties are important, the board's primary responsibility continues to be one of providing stewardship oversight to the organization, including oversight of operational tasks carried out by board members. Many governance specialists will advise operational boards to “get out of the weeds” of operations, and get the “bird’s eye view”. However, if your board is operational, be sure it is aware of its diverse responsibilities.

MORE KEY BOARD RESPONSIBILITIES:
UNDERSTAND THE BOARD’S MANDATE

According to Deloitte and Touche, The Effective Non-Profit Board, “boards of every organization must clearly understand agree upon their responsibilities and mandate.” This is particularly important for non-profit boards, given their diverse nature and various mechanisms with which they are constituted. The purpose of the mandate is to ensure that no expectation gaps exist between the board, management and other stakeholders in regard to the board’s role. The mandate should clearly define the board’s authority, responsibilities and accountabilities. It should also serve as a key component for various board activities. The mandate can be the basis of the board’s workplan.

A board’s mandate may include:

  • Its responsibilities;
  • Composition, including the size of the board, how board members are identified and criteria for board membership and board committees
  • Key processes, including the number of board meetings, procedures for setting agendas, minutes; and
  • Evaluations, accountabilities and required reporting.

    Once compiled this information is provided to all members, management and other stakeholders…it is a great document for board member orientation.

BOARD SELF-MONITORING AND EVALUATION

The way in which the board is structured can affect its ability to provide effective stewardship. The board should be independent of management and, therefore, be objective when monitoring and assessing management's activities.

The structure and mandates of the board and each of its committees should be documented, to help ensure that board members, management and the organization’s stakeholders clearly understand the board's role. The board should also consider the qualifications it requires of individual board members in order for them to help carry out the board's responsibilities.
Non-profit boards should periodically review their size and membership to ensure that they are conducive to effective decision-making. For example, if the board is too large, individual members may lose a sense of personal accountability for board decisions. If the board is required to reflect particular constituencies, are more distant members able to attend all meetings and to participate fully on board committees?

BOARD COMMITTEES

Today, boards conduct an increasing number of activities through committees. In many instances, members of key committees may be granted more responsibility for a particular area by the board as a whole (for example, an executive committee may be given the authority to review information and make recommendations or decisions on behalf of the entire board). Boards should carefully determine the various committees needed and appropriate, and clearly define their roles, responsibilities, and membership.

EXECUTIVE DIRECTOR PERFORMANCE
AND SUCCESSION PLANNING

The executive director should have a job description that clearly articulates the parameters of the paid role, compared to volunteer board members. The board should ensure that the expectations for the position are clearly articulated so that a regular performance appraisal can be done. Regular performance appraisals are an essential means to providing feedback to the work of the organization, and its progress towards overarching goals of the organization. The board must also ensure that it has plans in place should the Executive Director leave the position, or take a leave of absence. It is ultimately the board’s responsibility to keep the organization running during periods of this type of change.

EMPOWERING YOUR BOARD

Governance is in a state of evolution, not just among non-profit organizations but also in the corporate environment. It may be an easy fit, or it may take time to iron out the policies, procedures and governance structure that works best. Boards should be empowered to make the changes they need to make. They need to continually reassess their governance practices: many boards perform annual evaluations, and some monitor and give feedback on every meeting. When all members feel they understand their role in the governance process, the organization will benefit!

Ideas and concepts excerpted from The Effective Not-for-Profit Board: A value-driving force. Deloitte Centre for Corporate Governance, 2013 Deloitte LLP and Governance Works, Barbara Laskin, 2007.

Other links:

The Effective Not-for-Profit Board: A value-driving force. Deloitte Centre for Corporate Governance, 2013 Deloitte LLP.

Governance WorksBarbara Laskin, published by Arts and Cultural Industries Association of Manitoba Inc. and SaskCulture Inc., 2007.

 

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