Boards: Why do they matter?

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Boards: Who has them? Who is on them? What is their purpose?

Nonprofit Quarterly contributor Ruth McCambridge has a unique perspective when it comes to the utility of boards. In a debate at a September 2012 BoardSource conference, Ruth argued that boards are well-worth the trouble and she did so with a metaphor about refrigerator bins. Refrigerator bins? Yes, refrigerator bins. First, she asked if everyone had a refrigerator. Then she asked if they governed their refrigerator. She explained that when she buys vegetables, she puts them in the bin where they belong. As time goes on, she uses the groceries on the shelves and the refrigerator inevitably begins to smell because of the now rotting vegetables in the bottom bin. That does not mean boards should be compared to smelly vegetables but rather that a refrigerator, much like an organization, has many departments and levels. If not governed by an overarching body, parts of the organization may be overlooked or forgotten and eventually turn into the smelly rotting vegetables that nobody wants to clean up. My point, Ruth says, is that when we are helping to lead something complex, many of us get very focused on one realm, while another realm shape shifts inside the bin where we dont normally look.1 In this analogy, you can see how the vegetables demonstrate a need for governing bodies with both nonprofit and for-profit organizations in order to provide operational oversight and overall strategy. (And while decaying veggies arent a fun picture, you get the point!) This Blue Paper dives into board governance to answer these questions: Where do they work, what they do and why do they matter? From nonprofit to forprofit to the different life stages and models, from small boards to big ones, by the time you reach the end of this Blue Paper, youll understand a great deal more about boards and keep an eye on those vegetables in the refrigerator bin.

1 McCambridge, Ruth. Are Boards Worth the Trouble? Are Boards Worth the Trouble? - NPQ - Nonprofit Quarterly - Promoting an Active and Engaged Democracy. Nonprofit Quarterly, 19 Sept. 2012. Web. 23 Oct. 2012. <http://www.nonprofitquarterly.org/management/21028-are-boards-worth-the-trouble.html>.
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Whereand howdoes a board fit in?

Most nonprofit organizations and every publicly-owned for-profit corporation has a board of directors. The board of directors acts as the governing body of that business organization which, like a person, can own bank accounts and enter into contracts as its own legal entity.2 But, itthis conglomeration of people behind the businessneeds to be held accountable for its actions and to its owners in the event something goes wrong, especially in times of transition. Thats where the job of the board of directors begins. The board of directors watches over the organization. The board is the governing body of a corporation and has three primary responsibilities: to provide oversight as a governing body, to work with and delegate appropriately to the organizations chief executive and to help develop strategic direction. The board also ensures that the executive outlook coincides with the direction key stakeholders envision for the organization. Below, Figure A adequately illustrates the relationship between the board of directors and the organization, with the organizations executive leadership serving as the primary link between the two. Figure A. A closer look at the board-executive relationship

Source: Leading Resources Incorporated The board, whether for-profit or nonprofit, doesnt act alone: Both oversight and strategy development responsibilities overlap with those of the organizations executive leadership. However, there are some differences between the two. Figure B illustrates some of them.

2 McNamara, Carter. What Is a Board of Directors? What Does a Board Look Like?All About Boards of Directors (For-Profit and Nonprofit). Authenticity Consulting, LLC., n.d. Web. 23 Oct. 2012. <http://managementhelp.org/boards/index.htm>.
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Figure B. For-profit vs. nonprofit boards

Purpose Success Role of director Compensation Fundraising responsibilities

For-profit Earn revenue for owners (shareholders) Increased profit margins and greater revenue Usually on the board Likely Unlikely

Nonprofit Serve the public Meet the publics needs Not usually on the board Unlikely Likely

For-profit and nonprofit boards have similarities, too. Those similarities are most prevalent in their responsibilities. But when it comes to responsibilities, what exactly does it mean to govern a corporation and enforce accountability?

What do boards do?

Members of the board of directors have fiduciary duties.3 Fiduciary pertains to the nature of trust or confidence and refers to duties of care and loyalty. These kinds of duties entail participating in organization activities, positively representing the organization, continually thinking on organizational priorities and engaging with colleagues to share ideas for progress. The trust and confidence element of the fiduciary duties of care and loyalty simply mean that board members keep business operations and the status of the organization confidential. Here are some specifics about board members short- and long-term jobs with the help of Carter McNamara of Authenticity Consulting, LLC.4 Establish mission and vision. Every organization has a raison detre, or a reason for being, which is captured in the mission and vision statements. Boards that begin with an organization just starting scratch are often tasked with the responsibility of establishing the mission and vision statements, whereas people that join an existing board must simply act in accordance with them. Contribute to organizational planning. Executive leadership may see the organization going one way, while key stakeholders, or shareholders, see it going another. Thats why determining both shortand long-term goals tend to be an area of joint effort between the executive leadership and the board. Select executive leadership. From the application to the on-boarding
3 Ibid. 4 Ibid.
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process, the board of directors is tasked with the job of choosing a candidate for the position of CEO, as well as developing a succession plan. Support executive leadership. The relationship between the board of directors and the executive director of a nonprofit, or between the board of directors and the CEO of a for-profit corporation, is very important. The board and the leadership work closely to ensure that their respective outlooks and strategies align and that, ultimately, theyre working towards the same goal. This requires a great deal of communication between the board of directors and executive leadership. Evaluate executive leadership performance. In addition to maintaining a strong working relationship, board members also need to evaluate the performance of the CEO or executive director based on benchmarks and metrics of success to determine how well they are meeting their goals. Ensure and manage resources. Boards have access to and authority over a corporations financial statements. From funding distribution to budgeting, all boards have financial obligations. In the case of a nonprofit, board of directors are required to do a fair amount of fundraising to meet financial goals from year to year. Evaluate program and service performance. Board members also need to look at individual programs and services. Are they effective? Are they worthwhile investments? Being an active and engaged part of a board is not an easy job. Indeed, it requires a lot of work. There is constant interaction between the executive(s) and other board members to carry out the above jobs, plus duties of care and loyalty, take a lot of time and effort. Thats why the organizations mission is so critical. Board members ought to be first and foremost dedicated to the mission of the organization above all else.

Life stages
Boards exist in various life stages. These stages depend on the status of the organization: Is it new or is it well-established? Is it a small effort that only requires a handful of people, or is this a gargantuan city, state or nation-wide initiative?

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Generally, boards begin as working boards. From administrative tasks to handson activities, a working board performs the day-to-day work of the organization and manages lofty strategic planning responsibilities to-boot. As the organization grows, the board becomes more established and begins to take on the characteristics of collective or top-level boards, which are more policy-oriented.5

A big board, or a small one?

State law mandates a minimum membership requirement for nonprofit organizations.6 The minimum is usually three, but in some states just one board member will do.7 As mentioned above, most boards tend to start out small with a donor or small number of members and expand as the organization (or family) grows and funding areas or programs diversify.8 Here are some additional factors that determine board size courtesy of the Council on Foundations: The type of organization and the kind of work it is committed to Where the board is in terms of its life cycle How the board is structured What kind of financial assets are available Fundraising requirements Voting procedures (Most boards strive for an odd number of members to prevent ties.) In a 2009 study by the Foundation Center, between 11,600 foundations that were surveyed, the median board member count was 5.5.9 Rationale for appropriate size varies. Some boards decide to go large for the purposes of a quorum, which dictates the percentage of board members that need to be present at a meeting for a vote to take place and count. For example, a common quorum is half the number of board members plus one.10 Alternatively, some organizations like community foundations, are simply built to have large boards simply because of the fundraising responsibilities that come with the proverbial territory. Small boards are more flexible when it comes to meetings and agendas. Smaller boards also tend to be tighter knit. Although, the risk that comes with a smaller board is that of narrow-mindedness and stagnation.

5 Ibid. 6 What Is the Best Size for Your Board? Council on Foundations, 2010. Web. 23 Oct. 2012. <http://www.cof.org/files/Documents/Governing_Boards/Board%20Briefs/Boardsize.pdf>. 7 Ibid. 8 Ibid. 9 Ibid. 10 Ibid.
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A reasonable board size can depend on how long your board meetings are and how much time you are willing to spend while numerous board members weigh in on agenda topics. The chair will need to make sure that everyone is heard and that everyones questions are answered. That is easier with smaller rather than larger numbers. -D.K. Spencer, former President and CEO, Midland Area Community Foundation/Clare County Community Foundation Inevitably, the larger the board, the more bureaucracy there tends to be. However, larger boards have the added advantage of diversity and a wider range of viewpoints and ideas. According to the Council on Foundations, Diversity demonstrates your boards connection to the community.11 More input means more to consider and a more meaningful breadth of views to consider. New blood can be healthy for the boardit brings new energy, new passionand it can rekindle the spirit of the foundation. When the new members came on, the passion grew on the board. The new members brought in a new, younger perspective and new insights on our funding areas. -J. Stamstad, former Executive Director, James R. Thorpe Foundation There are two notable patterns here: The first is that the larger the organization, the more recognition and the more money it is likely to have. In the case of most for-profit boards, board of director members are compensated for their time and effort, something that helps attract capable people to an organizational board. The second pattern is that the larger the board, the more formality it is likely to have, such that there is a great deal of attention to parliamentary procedures and highly proceduralized operations.12 As boards grow over time, the ultimate working model is of a large and institutionalized board with multiple smaller committees to execute focused tasks.

Officer positions
A board is made up of many people and among them are a select few officer positions. Most boards offer three key officer roles between chairman, secretary and treasurer, though some also account for vice-chair, past-chair and future chair, all of which act in supporting roles. Board positions are explained in the organizations board bylaws, or rules (which come a bit later.)

11 Ibid. 12 How Nonprofits Differ From For-Profits and How They Are the Same. Authenticity Consulting, LLC., 2008. Web. 23 Oct. 2012. <http://managementhelp.org/misc/Nonprofits-ForProfits.pdf>.
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The chairman, or chairwoman, of the board may also be called the director or the president. Their first priority is effective leadership. As such, he or she will have to manage the general dynamic of the board and enforce openness and transparency so that board actions are clear. Some other duties are listed below:13 Develop the meeting agenda and preside over meetings. Maintain the minimum number of people on the board. Recruit other members of the community to join the board and build credibility. Exhibit model behavior and model communication, especially between the board and organizational executive leadership. Contribute to strategy development with the executive team, streamline it, and then supervise its execution by management. Oversee and assess executive performance. Prepare for a potential exit by drawing up a contingency plan that includes a possible candidate to step in in case of an emergency. Lastly, the chairman of a nonprofit board needs to meaningfully engage with the community as one of the most visible members of the organization. More than the specifics, however, is how the specifics are executed. If you are thinking about joining a board, or if you are already a part of one and looking to the chairman position, here are some more meaningful tips and tricks:14 Focus on the organizationwhether for-profit or nonprofitas a business. Always make yourself available to other board members and executive leadership. If you are on the board at a nonprofit, remind staff that they are accountable to you, to the mission of organization, and to the community you serve. Have a person or two in mind to take over your position in the event of an emergency, someone who knows the organization well and will be able to lead it as you do. Contribute to the organization in a way that will leave it, and you, with a positive legacy.

13 Corsi, Carlo, Guilherme Dale, Julie Hembrock, and Willi Schoppen. Five Things Board Directors Should Be Thinking about.Five Things Board Directors Should Be Thinking about. SpencerStuart, 01 Dec. 2010. Web. 23 Oct. 2012. <http://www.spencerstuart.com/research/articles/1475/>. 14 Douglas, Eric. Lessons for a Board President.Lessons for a Board President | Leading at Light Speed by Eric Douglas. Leading Resources Incorporated, 22 Mar. 2010. Web. 23 Oct. 2012. <http://blog.leadingresources.com/324/lessons-for-a-board-president>.
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To be sure, if you become the chairman of a board someday, you will have the most responsibility of any other. In some cases you may have the help of a vicepresident whose job it is to assist and support you, the chairman, and be willing and ready to step up in case you are unable to lead for any reason. In addition, you will also have the help of the board secretary and treasurer. The board secretary has the following responsibilities: Keep meeting notes. Track meeting minutes. Certify formal and/or legal documents. Board treasurer, on the other hand, is the primary authority on all things money-related as they provide financial expertise and leadership to the organization.15 They are responsible for: Annual budgets Audits Forecasting The ideal board treasurer has a thorough understanding of finances and financial reports and is able to convey money-related concepts and consequences to others with ease. A really talented treasurer is able to interpret board questions and connect money to the mission of the organization.16 Depending on the size of the organization, there may be a handful of people in charge of smaller committees able to deal more closely with important board areas. They, too, are very helpful members of the board.

Board committeestypes and the role of committee chairs

Committees play a central role in boards. Committees are comprised of small groups of board members that come together to work on issues too complicated for the entire board to manage. Establishing committees makes for easier project management and board member engagement on a wide array of topics. Below is an overview of some of the permanent committees within boards: Board development/personnel. How can the board grow as a group? Is there any internal strife? Who in the community would be an asset on the board?

15 Barr, Kate. Balancing the Mission Checkbook.What Makes a Great Board Treasurer? Nonprofits Assistance Fund, 28 Sept. 2010. Web. 23 Oct. 2012. <http://www.nonprofitsassistancefund.org/blog/2010/09/28/what-makes-a-great-board-treasurer/>. 16 Ibid.
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 Finance. How is the organization performing financially? What actions need to be taken to ensure revenue generation and/or avoid spending beyond the agreed-upon budget? Evaluation. How is the organization performing at a whole? What are some of the shortfalls? Is it living up to its mission and vision statement? Executive. Is the chief executive officer an effective leader? If not, what steps should be taken? Who is the ideal back-up candidate in the event of an emergency? Marketing/public relations. What are some ways to promote the organization and the board? How best to reach out to employees and/ or the community? Program development. What programs need to be developed, or which programs need to be reconsidered? Are there any other program ideas the organization could implement to be more successful? Sometimes, however, the need for a committee is only temporary: for example, if the board is hosting a community-wide event, or conducting a capital campaign. Both are salient examples of projects best handled by a smaller group of people. The person in charge of the various committees is known as a committee chair. They are comparable to project managers in that they oversee committee activities and report back to the board on progress. Becoming a committee chair is a good way to gain leadership experience within a board and a stepping stone to taking on an officer role with more responsibility in the future.

Term limits and board bylaws

Something to consider as a board grows and becomes more capable is the idea of term limits, or the length of time in which board members are able to serve. Term limits dont necessarily mean that officers have to leave the board at the end of their term. That depends on whats written in the bylaws, or rules, which are covered in the next section. (See below.)There are advantages and disadvantages to term limits, but again, they are ultimately contingent on the purpose and development of the organization and the life stage of the board. As with larger boards, the added advantage of term limits is that there are more frequent changes, and thus more diversity because with more diversity comes more ideas.17 If a board member is found to be ineffectual, a term limit guarantees that they will eventually relinquish their position to someone new. Then again, the disadvantage with term limits is that expertise is developed and

17 What Are the Advantages and Disadvantages of Term Limits? BoardSource, n.d. Web. 23 Oct. 2012. <http://www.boardsource.org/Knowledge.asp?ID=3.1240>.
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then rotated out, which can be difficult for an organization.18 Without term limits, however, organizations run the risk of stagnating as power becomes concentrated in one small group.19 Term limits vary by organization, but the rules (or lack of rules) are always explained in the board bylaws. If the formation and activities of a board were a game, bylaws would be the rules that dictate how the game is played. Essentially, bylaws dictate how the board is organized and how it operates. In addition to defining term limits and various positions, like those outlined above, bylaws include:20 Time, location and overall structure of meetings How many board members are needed in the organization What kinds of qualifications board members should have If the corporation is a for-profit, bylaws should include the title and rate of pay for officer positions Rules regarding the approval of contracts, loans, checks and, if a for-profit, stock certificates Process by which a board law, article, charter or constitution may be changed Just as a game cannot be played without the rules, a board cannot operate without standards to guide its activities. Bylaws should be set in one of the first meetings so that board meetings thereafter have a set structure and flow to follow.

Board selection, nomination, application

Joining as a director on a board for a local nonprofit organization or for-profit corporation in your area depends on what your interests are. What do you want to learn more about? How do you want to apply your leadership skills? Opportunities abound and all it takes is a little looking. Ask acquaintances, friends and family, your local community foundation or chamber of commerce they are all resources to help you become part of a board. Alternatively, you can visit boardnetUSA to find opportunities near you, too. Once youve found a prospective organization, its helpful to find out more about itits mission and its role in the community, what kind of an impact it has and what kind of an impact it aspires to make in the future. One of the best resources is someone already involved in the organization like a staff member or
18 Ibid. 19 Ibid. 20 What Are Corporate Bylaws and Why Are They Important?All Business. Dun & Bradstreet, n.d. Web. 23 Oct. 2012. <http://www.allbusiness.com/corporate-governance/corporate-formalities/1389-1.html>.
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an existing director on the board. In fact, some boards require a certain degree of familiarity of their incoming board members, meaning they may first have to be recommended by someone already on the board. This is where personal connections and professional networking come into play: You never know where or how your professional contacts may be able to help you beyond the office. An important thing to consider if you want to become a board member is your skillset. What professional skills do you have? What makes you a valuable asset? Then, take a look at the credentials of some of the existing board members to determine where you might fit in best. Highlight your skills in an application or letter of intent if the board requires one.

Conflicts of interest and other potential problems

Conflicts of interest can be an especially problematic area for boards. A conflict of interest arises when the personal or professional interests of a board member clash with the best interests of the board or organization the board represents.21 Conflicts of interest are oftentimes the result of impropriety, or a failure to observe agreed-upon standards, including dishonesty, or improper behavior by one of the board members. When a conflict of interest occurs, a board must act quickly to mitigate a potentially damaged reputation within the community and a corresponding loss of confidence in the organization. Here are some tips to avoid conflicts of interest in your organization:22 As chairman, be straightforward with your colleagues on the board and encourage them to do the same. As a board member, prepare to disclose any organizationally sensitive information to the board. As chairman, be open with board members about a conflict, especially before a vote. Avoid business transactions with board members and adopt a policy to this end. Insist that board members involved in the conflict withdraw from a decision related to a conflict they may be involved with. Its not difficult to avoid conflict. Sometimes, all it takes is a little procedure and adherence to set procedures over timeand thats where bylaws comes into play. Stick to the rules and, as they say, nobody gets hurt.

21 What is a Conflict of Interest? BoardSource, n.d. Web. 23 Oct. 2012. <http://www.boardsource.org/Knowledge.asp?ID=3.382>. 22 Ibid.
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Social responsibility: Not just for nonprofit boards

The role of corporations is changing. For-profit boards, with their corporate guidance and governance responsibilities are changing, too, because when it comes to business these days, its not all business as usual. In fact, more and more corporations are discovering that there is a lot more to business than a balanced budget and a profit to show at the end of the year. Forbes contributor Donald Delves raises a salient question: Who do companies serve?23 His is the kind of question board members and especially board chairmen and board members should be mindful of. As globalization continues to change the world in which we work, its critical to continually reevaluate the mission and direction of the organization and then to determine exactly how the role of a particular small business or global multinational corporation is changing and how their audience is changing. Then, as a board member, how do you react and guide the company more efficiently through that change? Delves cites Kimberly-Clark, a multinational corporation based in northeast Wisconsin. He notes that KCs emphasis on public accountability earned it a spot in Corporate Responsibility magazine for a Best Corporate Citizen rating. It was Kimberly-Clarks commitment to environmental and human rights issues that helped it achieve this rating. Kimberly-Clark is not alone. This ever-changing notion of accountability can be seen in Southwest Airlines, too. Southwest is changing their modus operandi, a Latin term meaning method of operating, to reflect the corporate responsibility trend. Quarterly reports dont just contain financial reports anymore. In fact, their One Report People, Profits, Planet is an example of a new kind of integrated reporting that seeks to combine performance assessments and company status relating to corporate responsibility goals. As key stakeholders and shareholders take note of this increasingly popular trend, they will begin to respond to, and request, activities that demonstrate a similar commitment to social responsibility because, as Delves notes, Social responsibility isnt just good citizenship; its also good business.24 These companies would not have made these moves to become more intimately involved in the world around them were it not for the people leading them into the future: Their executive leadership and their board of directors. Executive leadership may not always be aware of whats happening outside the company, or that customers who care about their communities are becoming business as
23 Delves, Donald. Whom Do Public Companies Now Serve?Whom Do Public Companies Now Serve? - Forbes. Forbes Magazine, 09 Mar. 2011. Web. 23 Oct. 2012. <http://www.forbes.com/sites/donalddelves/2011/03/09/whom-do-public-companies-now-serve/>. 24 Ibid.
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usual. In these instances, the board of directors likely had to alert the executive leadership to the smelly vegetables in the fridge and nudge them to address the changing situation.

Conclusion
So, oddly enough, the concept of organizational boards can be explained with a vegetables-in-the-refrigerator-bin metaphor. That metaphor helps capture why boards are well-worth the trouble. This is why, in the words of Ruth McCambridge: We need a group to provide the level and diversity of challenges that a nonprofit needs to keep itself true to its constituents.25 As the member of a for-profit or nonprofit corporation board of directors, you have the opportunity to affect social responsibilitymaybe even affect social change. Board members play an essential role in the governance and guidance of organizations, many of them global, and many with the capacity to make a positive difference in the lives of many.

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25 McCambridge, Ruth. Are Boards Worth the Trouble? Are Boards Worth the Trouble? - NPQ - Nonprofit Quarterly - Promoting an Active and Engaged Democracy. Nonprofit Quarterly, 19 Sept. 2012. Web. 23 Oct. 2012. <http://www.nonprofitquarterly.org/management/21028-are-boards-worth-the-trouble.html>.
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