Joining a Nonprofit Board

What You Need to Know

Marc J. Epstein, F. Warren McFarlan

• Publisher: Jossey-Bass
• Year: 2011
• ISBN:
  9781118007198
• Edition: 1
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

Often business executives serve (or are asked to serve) as board members of nonprofit organizations. However, without a clear understanding of how nonprofits work, service on a board can be a frustrating experience.

Joining a Nonprofit Board offers an important guide to the roles and responsibilities of a nonprofit board member. Marc J. Epstein and F. Warren McFarlan provide a step-by-step guide to how board members can work with a nonprofit organization to achieve the organization's overarching mission, attain financial sustainability, and develop and execute the systems needed to accomplish both.

Based on more than 10 years of research from Rice University and Harvard Business School and filled with illustrative examples, Joining a Nonprofit Board explores the basic structure of a nonprofit, explains how to build and monitor a nonprofit's mission, and identifies how the board performs an effective assessment of a non-profit. The book also explores the challenges posed by the duality of leadership between the unpaid volunteer non-executive chairman of the board and the CEO.

Joining a Nonprofit Board includes a helpful explanation of a "board member's life cycle." The authors start with the decision to join a board and explain how to prepare for the first meeting. The book explores how to serve effectively the first two years and reveals what it takes to develop your ongoing role as a trustee. Finally the book describes how to transition off the board to other forms of service with the organization.

Joining a Nonprofit Board is a comprehensive resource for anyone who wants to take their experience in the business world and serve a nonprofit with passion and clarity.

Chapter 1

Introduction

Congratulations on having joined the board of a nonprofit! You have just become part of one of the most fulfilling and personally satisfying sectors of the economy. Currently, nonprofits account for more than 10 percent of the United States’ economic activity and employment. Nonprofits cover a wide array of organizations spanning hospitals (half of which are nonprofits), schools, colleges, museums, professional service organizations, social service organizations, and so on. The boards of all of these organizations are rooted deeply in the American tradition of volunteerism and trying to help others. You are unpaid and giving of yourself to the community.

The number of nonprofit organizations has increased dramatically in recent years. These include a wide variety of organizations from charitable organizations, social services, religious and fraternal organizations, health care societies and health organizations, educational organizations, environmental organizations, sports and recreational organizations, to funding foundations, business and professional organizations, political parties, and so on. Their purpose is to generate improvements in the lives of individuals, members, organizations, communities, and society as a whole. Some of these organizations, such as charities, may be considered purely social impact focused, whereas others, such as professional organizations, may be primarily viewed as member focused. However, classifying nonprofit organizations is not easy as some have elements of both types. For this reason, one should rather think of a continuum of nonprofit organizations spanning from purely socially focused to purely member focused organizations with numerous nonprofit organizations having dual roles of serving both their members and society. And, as noted in Table 1.1, there are some types of organizations that are always organized as nonprofits, whereas others like hospitals and certain educational institutions may be either for-profits or nonprofits.

Table 1.1 Structure of Organizations.

Usually Nonprofits	May Be For-Profit or Nonprofit	For-Profit
Charitable	Educational institutions	Publicly traded corporations
Professional associations	Hospitals	Privately held firms
Religious and fraternal organizations
Environmental
Community foundations

Participation in nonprofits is a very important part of business executives' lives and until relatively recently unrecognized. Business leaders find themselves on boards of directors of nonprofit organizations. We also find these organizations being led by professionals from the business world including professional accountants instead of individuals from traditional social service backgrounds. Surveys of HBS alumni for example show 80 percent or more self-report being involved with nonprofits during their careers with more than 50 percent serving or having served on one or more nonprofit boards. These organizations vary in size from small community music schools to multibillion dollar health organizations. These activities are widely supported by American culture (despite description in such books as Bowling Alone: The Collapse and Revival of American Community¹) and by U.S. federal tax policy where the Internal Revenue Service gives substantial relief for charitable deductions. In addition, local communities often exempt assets of nonprofits from taxes (although in Massachusetts, for example, colleges and hospitals often give gifts to the towns and cities in lieu of taxes).

The roots of philanthropy go well back into the nineteenth century. Names of great business leaders like Andrew Carnegie, J. P. Morgan, and John D. Rockefeller spring quickly to mind, as also being enormously significant philanthropists. Warren Buffet and Bill and Melinda Gates are present-day philanthropists whose work attracts our attention.

We find the topic remains relevant to the leaders of tomorrow, with today's MBA students showing especial interest. Nearly half of the MBA students at the Harvard Business School are currently enrolled in one or more nonprofit courses, with nearly 10 percent of the incoming class coming from this sector as full-time employees. These facts have held for the past five years. On graduation, 3–5 percent of the class takes internships or appointments in the sector. Indeed, this phenomena is a global one with significant numbers of nonprofit CEOs (throughout the book the terms CEO, president, and executive director will be used synonymously) coming to Harvard's nonprofit programs from as far as Australia, China, Singapore, India, and the United Kingdom. This book, however, will be primarily focused on the United States because of its very large role as a matter of public policy (which cedes to nonprofits significant domains that are covered by government in other countries). The United States also has a strong focus on individual philanthropy that is quite unique in the world.

Comparing Nonprofits and For-Profits

There are a number of important similarities and differences between the operations and challenges of nonprofits and for-profits of which a new nonprofit board member must be cognizant. Some of the more important items are discussed in this section.

Similarities

There are a number of similarities between for-profits and nonprofits which make people with for-profit experience particularly helpful as board members. The key similarities include:

1. Both organizations can grow, transform, merge, or die. Success is not guaranteed for either type of organization, but requires sustained work.

2. In both cases, cash is king. This for-profit focus is critical for a nonprofit board.

3. In both settings, good management and leadership really matter. Delivery of service, motivating and inspiring staff, and conceiving of new directions for growth are all vitally important.

4. Planning, budgeting, and performance measurement systems are vital in both settings.

5. Both types of organizations face the challenges of integrating subject matter specialists into a generalist framework.

6. Both organizations add value to society. They just do it in different ways.

In short, there is much overlap between the skills needed and perspectives provided by leaders in the two types of organizations. This is a key reason why social enterprise courses have taken root in business schools and why, appropriately socialized, those with for-profit backgrounds can contribute so much to the nonprofit world.

Having noted all of this, the blunt question in your mind is: why do I need to read a book on nonprofit management? Isn't it just a subset of the for-profit world, with little difference in the tasks and perspectives of managers and board members? Cannot the tools, practices, and viewpoints developed through a career of successful for-profit work be transferred to this new realm of nonprofit? The authors answer this question with an emphatic no! Although, as noted, many aspects are the same, in important areas there are deep differences. Failure to understand these differences can cause the new board member to stumble badly and perhaps irretrievably damage her credibility and effectiveness in a nonprofit organization.

Differences

At its core the nonprofit is fundamentally different than the for-profit. At the center of the nonprofit is its societal mission. Understanding the mission, helping the organization to fulfill it, and adapting it to a changing world is the very core of nonprofit governance and management. It is for this reason this book starts with a detailed discussion of mission and how it grows. Without the mission there is no purpose. Right behind this are the two major intertwined strategic themes that the nonprofit trustee must deal with.

The first theme is fulfilling the mission and whether we are doing it in a fiscally responsible fashion. Chapter Two deals with the complex multifaceted issue of mission definition and evaluation of its appropriateness. Chapter Three shows, in a series of examples, how organizations can go about measuring their performance against mission. For the new trustee, understanding these issues is the place to begin her trusteeship. The second theme is financial solvency. Chapter Four deals with the board's fiduciary responsibility and financial sustainability. Our life experience drives us to put this behind “performance measurement against mission.” Repeatedly we have seen new trustees and ineffective boards try to wag the mission dog with the financial tail. It just doesn't work that way. Without mission and its accountability we have nothing.

Achieving financial sustainability is very different for the nonprofit than the for-profit in that the nonprofit cannot easily access the public equity markets but instead has philanthropy as a potential additional source of funds. Chapter Five deals with the role of philanthropy and the trustee's role in it. This may be summarized by giving often and generously and when not giving helping others to give (hence the phrase give, get, or get off).

Finally, the execution of the work of the board is deeply different from that of boards in the for-profit world because of the tasks of mission performance measurement and different capital markets. As Chapter Six describes in detail, nonprofit boards are often larger, have more committees, and have a very different trustee life cycle. Further, as Chapter Seven describes, the heart of the governance process is a volunteer nonexecutive chairman and volunteer board, leading a staff of paid professionals. The dynamics of this are complex and profoundly different from the process in the for-profit world. Chapter Eight returns directly to you, the new trustee, addressing what you should consider before deciding to join a board and what you can do to make your trusteeship personally beneficial to you and the organization. The rest of this chapter gives an overview of these differences, which provide the structure of the book. These are highlighted in Table 1.2.

Table 1.2 Key Differences of For-Profit Versus Nonprofit Governance.

For-Profits	Nonprofits
Mission
Mission important	Mission very important
Financial results	Cash loss generator may be key service
Nonfinancial metrics important	Nonfinancial metrics of mission performance very important
Finance
Financial metrics of performance P&L, stock price, and cash flow very important	Financial metrics of meeting budget and cash flow projections also important
Funds come from operations and financial capital markets	Funds come from operations, debt, grants, and philanthropy
Short-term goals very important	Deep focus on long-term goals (as long as cash is there)
Executive
Small board—paid governance	Often large board—volunteer governance
Few board committees	Often many board committees
Combined chair/CEO plus lead director	Nonexecutive volunteer chair, plus CEO

I. Mission

In the absence of the discipline of a P&L statement, the development of a mission and measuring progress against it is a critical and different nonprofit task. Neither developing the mission nor tracking progress against it is easy to do. Mission will be discussed extensively in Chapter Two and mission performance metrics in Chapter Three, but we present a brief overview here. As a new trustee your single most important task in the first year is to internalize the full breadth and complexity of the organization's mission and assess how well you think the organization is working toward achieving it.

In the for-profit world, an economist would argue that the main objective and mission of an organization is through the provision of goods and services to earn an appropriate return on invested capital for its shareholders. The organization, of course, provides an additional variety of ancillary services such as employment, tax support for the community and state, and special contributions to local communities.

The nonprofit operates in the space between government-provided services and for-profit ones. Absent the discipline of the financial market on the one hand and government mandate on the other hand, special clarity is needed to both effectively allocate financial resources and monitor how they are spent. These tasks bring us to mission and mission accountability.

In its most basic form, mission is the reason the organization exists. It defines the specific social services the organization provides, guides investment decisions, and provides a basis for its performance to be evaluated. A case in point is the mission statement of the Dana Hall School,² a 100-year-old girls’ school, which evolved through twenty-six drafts in a time of financial stress. ...