By Marilyn Wyatt
Resource-AllianceAugust 2002
The recent wave of corporate scandals in the US has riveted attention on the function—and failure—of corporate boards of directors. "Where were the boards and what were they doing?" has been the common refrain as Enron, World Com, and other high flyers crash in a storm of revelations about insider trading, cooked books, and other dubious or fraudulent practices.
The response of most of these boards has been to seek cover. And with good reason: circumstances suggest board members were not only negligent, but complacent in the self-dealing culture that exhausted their companies' profits and reputation. Instead of governing, board members were grabbing and in the process betraying not only other shareholders' interests, but public confidence in the corporate sector as a whole.
In the wake of these scandals, experts have been quick to point out that responsible governance is an irreducible measure by which to judge the health of any publicly traded company. By taking part in a system of checks and balances with management, boards protect shareholders' investment by ensuring that sound decision-making advances the primary purpose of the company—turning a profit—in an accountable, legally responsible manner.
Similar principles of good governance are invoked in the public sector as the sine qua non of any properly functioning democratic system. The European Union's recent White Paper of Governance, for example, seeks to define steps that will open up the policy-making process and make EU institutions more accountable to the public. The paper suggests that good governance takes place mainly in a process of regular and open consultation and dialogue between government authorities and the citizens from whom their power is derived.
Clearly, in both the public and private sectors good governance is championed as the fundamental standard of responsible, accountable leadership. But what of the nonprofit sector? Is there a similar stress on good governance as an essential component of a competent and enduring nonprofit sector? Are governing bodies recognized and fostered as performing a core function that orders, connects, and sustains their organisations?
A need to step up responsibility
The answer, sadly, is no. Around the world, many nonprofit governing bodies—be they boards of directors, supervisory boards, management councils, or some other group—have yet to step up to the responsibilities that, at least theoretically, motivate their very existence. Boards that are invested by law with the responsibility of overseeing the organisation's performance fall short of this duty in numerous ways—by failing to meet regularly, merely rubber-stamping executive decisions, or lackadaisically investigating financial records and outlooks. Equally disappointing, parties outside the organisation with a stake in its success—be they donors, beneficiaries, or the public at large—have yet to forcefully assert the expectation that governing bodies protect their interests by serving as a counterweight to management control.
The huge irony here is that the nonprofit sector is united in a fundamental belief in good governance when it is understood as the need for governments and business to be more accountable to their publics. Missing, however, is any widespread acknowledgement that principles of good governance apply to nonprofits themselves—or that the sector is perhaps even subject to higher standards of governance, if its claim to serve as the bedrock of civil society is to have any merit.
The third sector has made remarkable progress in the past decade toward becoming a partner on equal footing with business and government. The number of nonprofits has soared; the wealth at their disposal has increased many times over; they are regularly consulted in diverse areas of policy formulation; and professional performance within organisations has improved dramatically. Clearly, the sector has taken great strides toward becoming a respected participant with business and government in critical areas of public concern.
Nevertheless, it's difficult to imagine that non-profits can assume an equal place if they act as if they are somehow exempt from the systems of checks and balances that anchor good governance in the corporate and public sectors. The self-imposed lack of clear and universal standards of governance serves only to limit the maturation of the nonprofit sector and its full integration into the public sphere.
The challenge of dual responsibility
The absence of competent governance structures and processes hampers the development of both individual organisations as well as the sector as a whole. Of course, nonprofit boards face a tough challenge in that (like corporate boards) they oversee the performance of a single entity, and at the same time (like governments) are accountable to a larger public that is difficult to define. Indeed, the nonprofit board must simultaneously deliberate on behalf of both the organisation they are a part of and a larger public composed of the individuals, organisations, businesses, and governments who invest their trust in the sector by providing donations and other support.
This dual responsibility can make it difficult for both nonprofit boards and their audiences to know who they speak for and whose interests they represent. A common result is that boards often choose to speak for nobody, deferring instead to a chief executive who has a simpler and narrower leadership focus.
Nonprofits that do not have in place a competent governance function are far less likely to acquire or retain the resources, credibility, and expertise they need to be secure, self-sustaining organisations. This may not be evident early on in the life of an organisation, but becomes increasingly important as an organisations matures and develops more complex programmes, relationships, and funding needs. In times of crisis, especially, the lack of a competent governing structures can be crippling, as even that pillar of the US nonprofit sector, the American Red Cross (ARC), is now discovering.
Allegations of mismanagement by ARC president Bernadette Healy and the ensuing loss of public confidence have thrust the board into an uncomfortable spotlight. Much as at Enron, how well the ARC board now acquits itself and the organisation of charges of wrong-doing and negligence is critical to the financial viability and, indeed, the very survival of the organisation. Rather than hiding, the ARC board has actively engaged public opinion with regular press conferences that aim at making the process of restructuring the organisation as transparent as possible while also proving that the board is fully in charge. While it is still too early to pass a definite judgment, the board seems to be successfully turning the tide of public opinion—the basis of its support—back in favor of the organisation.
Do not rely on a CEO alone
It's not necessary to wait until a time of crisis for an organisation to get its governing house in order. While many argue that a start-up organisation with a simple programme and a limited budget needs a strong and talented CEO more than an active board, beyond this initial phase of development the same case simply can't be made.
An organisation that does not have its governance function in place not only limits its growth to the capabilities of one executive, but puts itself at risk of immediate decline should that executive depart or prove incompetent or unworthy of the position. Boards are as indispensable to the wellbeing of the NGO as a competent staff, adequate funding, and a clear and necessary mission. Indeed, competent boards ensure that these other three components are in place and working in harmony. If they are not, the board fulfills its governance function by ensuring that these elements are integrated into the organisation and are mutually re-enforcing.
But how do we know when nonprofit governance is not merely competent, but good? The recently convened BoardSource Working Group on Nonprofit Governance in Central and Eastern Europe defines good governance this way:
"Good governance is a transparent decision-making process in which the leadership of a nonprofit organisation, in an effective and accountable way, directs resources and exercises power on the basis of shared values."Behind this formulation is the assumption that good governance is both focused in its application (directing resources and exercising power) and inclusive in its outlook (striving to be transparent and respectful of shared values). This definition of good governance recognises that a well-governed organisation is one in which the board's efforts are directed both inward and outward, towards the organisation and towards the community.
Simply put, boards serve as a link between the organisation and its larger community. For this reason good governance consists as much as of healthy relationships as competent processes. In governing well, boards perform a mediating role that is rooted in three essential board duties: access, accountability, and advocacy.
The Three A's of Good Governance
The first A of good governance—access—involves access to both information and people. Boards need to make sure that they are fully informed about the things they need to know about, especially in the areas of finances, programme outcomes, and chief executive performance.
Does this mean that boards need to given records of all expenditures or read-outs of every workshop conducted in the course of a year? Chief executives commonly fear that an open offer of information will lead to burdensome managerial responsibilities and will encourage the board to intrude in the organisation's daily affairs and micro-manage the staff.
But rather than being inundated with information, boards are well-informed when the information they receive is directed towards their governance function. Boards don't need to know everything, but what they do know must be accurate, timely, digestible, and conducive to "directing resources and exercising power in an effective and accountable way." Boards that understand the importance of good information will work with the chief executive to clarify their needs and ensure that a process is in place to ensure timely access to information in a format they can readily employ.
Access also involves access to people, especially people outside of the organisation. One of the most important contributions that board members can make is to form links to people who represent new sources of support, bring new perspectives on the work of the organisation, or offer services and advice that will improve the organisation's performance. While staff is focused on providing services to beneficiaries or forming partnerships with other nonprofits, board members can tie the organisation into completely different dimensions of the surrounding community—dimensions that, once accessible, can enrich, improve, and expand the organisation's activities.
This is especially important for reaching people in areas that do not touch on the daily work of the organisation, such as government and business. By providing access to a larger community, board members help nonprofits overcome the frequently well-grounded charge that they are insular and closed organisations making few contributions to society beyond the immediate scope of their activities.
Finally, access means ensuring that the public has available adequate information about the organisation to judge its health and performance. The board should ensure that an annual report is published, that financial reports supplied to tax authorities and donors are complete and accurate, and that other essential information is supplied to supporters, beneficiaries, and others with a need to know.
The second A of good governance—accountability—means many things to many people: timely and accurate financial statements to donors and tax officials; fulfillment of the organisation's mission to beneficiaries and supporters; conscientious evaluation of operations and outcomes to partners and staff. In all of its manifestations, accountability depends on a system of checks and balances in which the board provides an independent, disinterested (i.e. in no way self-interested) counterweight to managerial control.
How does the board ensure that an organisation is accountable? Three measures are especially important. First, the board must make sure that the organisation's financial records and reports are honest, up-to-date, and available. Financial information provided by staff must be independently assessed, preferably by outside auditors. Moreover, the board must ensure that the policies and procedures are in place to establish an efficient system of internal control.
This leads us to a second important measure: getting the staff off the board. A governing board composed wholly or mostly of staff is neither independent nor disinterested. When it comes to financial oversight, for example, boards made up of staff are scarcely able to implement a system of checks and balances since staff members are asked to monitor their own performance. Recusing staff from operational issues is a poor solution to this problem, since boards thereby undercut their effectiveness by failing to operate to full capacity.
As a third measure, the board must be accountable to itself. This means that the board must meet regularly, keep minutes of its meetings, record its decisions, and act on them. Equally important, board members must be able to identify potential conflicts of interest and have a mechanism for dealing with them. Boards, in short, need a clear and methodical ways of performing their duties, so their efforts are consistent rather than haphazard and their attention is focused rather than ad hoc.
The third A, advocacy, again underscores the dual responsibility of nonprofit boards to both the organisation and the community. First, board members have a duty to promote the organisation within the community. Volunteer board members are particularly persuasive in this role, because, unlike staff members, they have no personal stake in the organisation's success and thereby provide a face to the public that communicates commitment and sacrifice rather than gain.
Second, boards should also advocate for the community within the organisation. They can bring a fresh understanding of beneficiary needs, donor requirements, or public perceptions to decision-making and planning. A good board member understands large social, economic, or political trends and can bring that knowledge to bear on behalf of the organisation. On a more general level, board members also play an important role as advocates for change and renewal within the organisation. The detachment from day-to-day operational issues means that boards are often less wedded than staff to business as usual and thus more open to possibilities for innovation and growth.
How well nonprofits govern themselves is likely to become an important measure of success as the sector develops and matures. The sooner good governance is acknowledged to be a necessity rather than a luxury, the sooner nonprofits will take a deserved seat at the table with government and business as full-fledged participants in the public sphere. For this to happen, leaders of the nonprofit sector around the world must call more forcefully for acceptable standards of governance to be implemented in their own backyards. Individual organisations also have an important role to play: they can start to improve their own governance performance by honoring the three A's of good governance—access, accountability, and advocacy.
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