Arthur D. Collins, Jr. & Sophia Shaw
Managing Partners, Acorn Advisors LLC
During a recent conversation with a friend who has served on the boards of numerous corporations, cultural institutions, and civic organizations, one of us half-jokingly remarked, “When you’ve seen one board of directors, you’ve seen ONE board of directors.” Agreeing that the “seen one, seen ‘em all” adage doesn’t apply to boards, our friend went on to add an important caveat, saying, “Yes, but selecting good directors and getting the governance right makes all the difference in the world.” While it is certainly true that each board can be considered unique, every board—whether the directors oversee a Fortune 500 corporation, another size or type of for-profit company, or a nonprofit institution—benefits from conscientiously observing sound governance.
Since some confusion persists as to the factors that distinguish for-profit and nonprofit boards, even by some people who have served on both types of boards, we decided to outline some of the similarities and differences between the two. In addition, we have included several ideas on the characteristics that distinguish successful boards from those that aren’t, regardless if they are for-profit or nonprofit.
Similarities and Differences
1. Overarching Purpose
While some people might incorrectly think that for-profit and nonprofit organizations and boards are different in their commitment to overarching purpose (i.e., that nonprofits would have a higher dedication to mission and for-profits would be focused primarily on financial return), we have found that sustainable success for an organization of any size or type must be built on a strong foundation supported by a clearly stated and well-understood mission, strong governance principles, strict adherence to an enduring set of core values, respect for all people, and willingness to embrace change and adapt as necessary.
2. Governing Policies
Every organization should have written articles of incorporation, bylaws, and a set of governing policies that outline the fiduciary duties and responsibilities of the board of directors. These documents are generally similar in design and address the name of the organization, how it will be governed, and how the bylaws can be amended. Common elements of the bylaws include the roles and responsibilities of the board as a whole, board committees, and individual directors; the procedures pertaining to giving notice for and holding annual and special meetings; and the rules governing voting at those meetings (e.g., definition of a quorum, delegation of authority, voting percentages required to pass measures and amendments). At meetings, both for-profit and nonprofit boards usually follow the guidelines outlined in Robert’s Rules of Order. Standard board policies cover director independence, conflict of interest, conduct/ethics code, expectations, confidentiality, and indemnification.
3. Fiduciary Duties
All for-profit and nonprofit boards have two fundamental fiduciary duties; these are the duty of care and the duty of loyalty. A breach of either of these duties can lead to dismissal and potential personal liability for a board member. The duty of care requires that board members exercise “reasonable care” and act prudently as a “reasonable person” would be expected to in similar circumstances. As an aside, this is the first question that would need to be addressed if a board member were charged with negligence. In this regard, the “business judgment rule” generally applies to the legal safe harbor for all boards (i.e., directors are deemed to have acted appropriately if they follow a reasonable process, consider relevant facts, and make decisions in good faith). The duty of loyalty requires that board members put the institution’s best interests ahead of their own. Two other fiduciary duties—the duty of candor (the timely disclosure of material facts) and the duty of confidentiality (not disclosing sensitive or confidential information)—are either treated as a subset of the duties of care and loyalty or listed separately. Nonprofit boards also have an additional fiduciary duty—the duty of obedience—that requires directors to remain faithful to and supportive of the mission and goals of the organization. While these fiduciary duties are generally part of the onboarding orientation for most for-profit directors, they are often less frequently and less explicitly stated on many nonprofit boards.
4. Additional Major Responsibilities
One of the most important duties of both for-profit and nonprofit boards is to select and evaluate the organization’s CEO—and in the unfortunate situation when a CEO is not performing, to replace him or her in a timely manner. (The reader may wish to refer to CEO Selection and Evaluation Criteria on the Acorn Advisors website.) A related responsibility is to ensure that compensation programs for the CEO and other senior executives encourage and reward superior performance and foster the highest levels of ethical behavior.
Other points of commonality between nonprofit and for-profit boards include: ensuring that operating plans exist; that accurate financial statements are prepared and distributed; that financial resources are appropriately safeguarded and allocated to achieve near- and long-term organizational goals and objectives; that management’s actions are in the best interest of stakeholders; that necessary policies and procedures encourage legal and ethical compliance; that the public image of the organization is sound, even through a crisis; and that a positive culture exists throughout the organization. All boards have a responsibility to select capable board members; build and maintain diversity in board composition; annually assess the board’s performance; and “refresh” board membership from time to time. All board members also have the obligation (and honor) of serving as ambassadors for their organization and, as skills and interests allow, opportunities to be a coach, subject-area expert, and confidant to the CEO.
While for-profit and nonprofit board members have a responsibility to approve, remain current with, and oversee the execution of the organization’s strategic plan, members of nonprofit boards and earlier-stage companies generally have a higher level of participation in developing the plan from its initial stages, often serving on one or more strategic planning committees. History has shown that the more engaged board members are in developing and refining a nonprofit’s or early-stage company’s strategic plan, the more interested they become in financially investing in or supporting the plan’s execution.
5. Titles and Reporting Relationships
A for-profit board is made up of directors that represent the interest of the shareholders (i.e., the owners) of the entity. A nonprofit institution does not have shareholders because it is not owned; however, it does have a board of trustees, directors, or governors (these terms that are used interchangeably). While not a significant factor in the governance of for-profit and nonprofit organizations, the title of the senior executive of a for-profit corporation is always the CEO. In the United States, CEOs of for-profit companies frequently carry the chairman of the board title, but not always—in Europe, however, the CEO and chairman positions are normally split. If the CEO is not the chairman, then either another member of management (e.g., the former CEO in a transition period) or an independent director fills that role. If the CEO is also the chairman, it is common practice in publicly traded companies for a lead director to be named. Some large privately held companies combine the CEO and chairman title, but do not have a lead director (e.g., Cargill). In some law firms, investment firms, private equity firms, and venture capital firms, the most senior executive may carry the CEO title (e.g., chairman & CEO at Goldman Sachs; co-chairman and co-CEO at KKR) or not (e.g., executive partner at Skadden, Arps, Slate, Mengher & Flom; executive committee chair at Sidley Austin; founder & managing partner at Madison Dearborn Partners; managing partner at Oak Hill Capital Partners). In nonprofit organizations, the senior member of management may hold the CEO title (e.g., American Red Cross, Nature Conservancy, Chicago Botanic Garden) or may not (e.g., president and director at the Art Institute of Chicago; executive director at the Walker Art Center; director at the J. Paul Getty Museum). In either case, there is almost always a non-management, independent board chair of a nonprofit organization.
6. Financial Focus and Terminology
Even though for-profit and nonprofit boards are ultimately responsible for the oversight of the financial wellbeing of the organizations they represent, for-profit management teams have an obligation to deliver a financial return to shareholders. As a result, for-profit boards are focused on net earnings, the stock price, and the dividend rate. Terms that are commonly bandied about in the boardrooms of publicly traded companies would never be heard during a nonprofit board meeting (e.g., earnings per share, EBITDA, quarterly earnings, dividend rate, stock buyback, consensus estimate, buy/hold/sell recommendations from sell-side analysts, value vs. growth stock classification, proxy statement, shareholder proposals, activist risk). In addition, there is unique consideration given to certain external regulations during for-profit board committee meetings (e.g., Sarbanes-Oxley in the audit committee; proxy advisory firms in the compensation committee; Dodd-Frank in the audit or risk committees; or the Foreign Corrupt Practices Act in the legal committee).
In contrast, many nonprofit organizations rely heavily on fundraising and use a slightly different accounting methodology, especially for valuing pledges and donations. Correspondingly, there are phrases used and topics discussed in a number of nonprofit boardrooms that would never be heard in a for-profit boardroom (e.g., endowment draw; donor capacity; restricted, temporarily restricted, and unrestricted gifts; statement of activity; operating surplus or net change in net assets). While some governance experts have suggested that nonprofit boards are much more focused on long-term versus short-term performance as compared to for-profit boards, we believe that any responsible board should be interested in both.
7. Remuneration and Financial Obligations of Directors
For-profit directors are compensated in cash, company stock, stock options, or a combination thereof, while nonprofit directors receive no financial remuneration for their service. In fact, nonprofit directors are generally expected to invest in (make donations to) the institutions they govern (e.g., supporting the annual fund, galas and other social events, and periodic capital and endowment campaigns) or to help raise money for the organization (with a common tenant being, “give, get, or get off”). Furthermore, all board-related expenses are reimbursed to for-profit directors, while nonprofit directors generally underwrite their own travel and lodging. These differing financial practices underpin a number of other more obvious or nuanced differences between for-profit and nonprofit boards that will be discussed subsequently.
8. Board Committees
Much of the work that falls under the purview of any board of directors is delegated to board committees. Committee charters are generally outlined in the board’s core governing policies, and most every board has standing committees that include audit, compensation (or human resources), governance & nominating, and executive. Beyond the standard committees just mentioned, it is common practice for both for-profit and nonprofit organizations to have one to two additional board committees, which could include including finance & investment, public affairs & social responsibility, and risk management.
Additional standing board committees will generally depend on the specific industry or focus of the organization—e.g., science & technology (high tech firms, natural history museums/botanic gardens); quality & regulatory (hospitals and healthcare companies); academic affairs (higher education institutions); strategic planning (discussed previously), and collections, visitor engagement, and education (museums of all kinds). While for-profit corporations may have a maximum of one to two additional board committees outside of the standing committees, nonprofit organizations, especially large ones, often have a much larger number—this is generally intended to help engage board members in a variety of mission-centric topics. For example, the Metropolitan Museum of Art has 18 standing board committees, Harvard University has 11 standing board committees, and Memorial Sloan Kettering Cancer Center has 21 standing board committees.
All boards maintain flexibility to constitute ad hoc committees in order to oversee significant events or temporary situations—e.g., mergers, acquisitions, divestitures, specific legal matters, special investigations, fundraising campaigns, and strategic planning. As communication technology has advanced, most for-profit boards have shifted to providing pre-meeting reading material electronically through board portals (e.g., Boardvantage, Diligent, BoardEffect, etc.), while nonprofit boards most often utilize the institutional website for expense reasons.
9. Board Size
For-profit boards, and particularly those of Fortune 500 corporations, have a much tighter range in the number of directors (generally between 10 and 15, with an average of about 11 or 12) than do nonprofit boards. While there is wide variation in the size of nonprofit boards, it is not uncommon for the boards of museums, universities, and hospitals to be more than four to five times the size of a corporate board. For example, the Museum of Science and Industry in Chicago has 80 trustees and 30 life trustees, and the Museum of Modern Art in New York has over 60 trustees and about 30 life and honorary trustees. Northwestern University has about 70 trustees, the University of Pennsylvania about 60 trustees, Stanford University about 40 trustees, and Wellesley College over 70 trustees and trustee emeriti. The Mayo Clinic has close to 40 trustees, the Cleveland Clinic has over 70 trustees, and New York-Presbyterian Hospital/Weill Cornell Medical Center has 90 trustees. On the other hand, foundation boards, which govern nonprofits in the business of giving away money (rather than needing to raise it), generally are much smaller and closer in number of directors to corporate boards. For example, the MacArthur Foundation and the Bill & Melinda Gates Foundation both have 11 directors, the Rockefeller and Ford Foundations both have 14 trustees, and the Pew Charitable Trust has 13 directors. Falling somewhere in the middle are many public service and charitable boards, as evidenced by the American Cancer Society with 16 directors and U.S.A. United Way and Feeding America both with 19 trustees or directors. However, it should be noted that many pan-U.S. organizations with small national boards additionally have a large state or regional boards. When a nonprofit board is very large, the executive committee many times functions in a decision-making capacity similar to that of the full board of a for-profit company.
10. Board of Directors Selection Criteria
For-profit board members are selected based on their executive, industry, and functional experience, but without consideration of their net worth or ability to financially support the institution. It is also common for privately held family-controlled corporations to have their boards populated by a mix of family-member and independent directors. Sometimes family-member directors span several generations, and it is not uncommon for some or all of the younger generation family-member directors to be employed outside the company (e.g., none of the six family-member directors on the 17-member Cargill board work for the company, and they span two generations). Board member diversity (e.g., gender, socio-economic background, race, religion, nationality) has become an important focus to help broaden and enrich for-profit and nonprofit board discussions, to better mirror the demographic of the customers served, and to meet the interests of regulators and stakeholders.
Even though many nonprofit board members are also selected based on their career accomplishments, subject-matter expertise, and civic leadership, the ability to provide financial support (personally and from their companies or foundations) is a chief consideration, particularly if the nonprofit organization relies on donations to fund their operating budget and capital expenditures. In this regard, is not uncommon for some nonprofit organizations to invite an interested member of a well-known or wealthy family to serve on the board; this does not occur on the boards of public companies.
11. Frequency of Board Meetings
The theoretical answer to how frequently a board should meet is simply as often as it takes to govern effectively. The practical answer depends much more on what is described in the organization’s bylaws, the state of the organization being governed, and the availability of directors to attend board meetings. For-profit standing board meetings generally number between five and seven a year, with three to four additional telephonic discussions. There is no general practice for nonprofit boards. The number of board meetings can vary by the size and maturity of the organization. For example, it would not be uncommon for start-up companies and newly formed nonprofits to meet on a monthly basis. On the other extreme, some nonprofit boards only meet two times a year. All this assumes that the organization is not in crisis—if some significant event does occur, or the organization is going through an intensive planning period (such as nonprofit strategic plan development), the number of in-person or teleconference board meetings can increase materially. As stated previously, it is not unusual for the executive committees of nonprofit organizations to convene more often than the full board.
12. Preparation for and Attendance at Board Meetings
Corporate directors are expected to be present in person at all standing board meetings, and corporate directors rarely miss attending board and committee meetings. If non-scheduled board meetings are called, most if not all directors are present in person or by phone, even if that means changing important personal plans. The Securities and Exchange Commission (SEC) requires proxy disclosure of any director that attends less than 75% of board and committee meetings. Corporate directors also generally spend about as much time preparing for a board meeting as they do attending the meeting, and they are expected to arrive having read all the pre-meeting briefing documents.
Recognizing that attendance varies widely on nonprofit boards, attendance rarely is mandatory and hardly ever approaches the levels found on corporate boards. In fact, some nonprofit board members never or rarely ever attend meetings—their contribution to the institution takes on other forms. Also, especially on large nonprofit boards, the preparatory materials are much more unevenly completed by directors than by those on for-profit boards.
13. Board and Director Evaluations
The type and rigor of board and committee evaluations vary widely among both for-profit and nonprofit boards, but director response to evaluation questionnaires is generally lower on nonprofit boards. Also, while individual board member performance evaluations are handled in different ways and are certainly not the norm on for-profit boards, they are essentially nonexistent on nonprofit boards. Asking a board member to resign or not stand for reelection for performance reasons is always difficult, but it does happen on for-profit boards. Asking a board member to resign from a nonprofit board that is dependent on financial donations rarely takes place unless that director has not met minimum financial giving guidelines.
14. Director Tenure and Term Limits
The vast majority of for-profit boards have a policy on director retirement, with the mandatory retirement age ranging from 70 to 75. The average retirement age on for-profit boards is increasing, with 72 now the most common retirement age, followed by 75. Many nonprofit boards have no retirement age for directors or trustees, maintaining individuals as voting members as long as they are active, prepared, engaged, and financially supportive. In order to honor many years of volunteer service and to maintain their involvement and support, a number of nonprofit boards elect some of their most devoted directors or trustees to “emeritus” or “life” status.
There is no standard or norm for the use of term limits (including length) on either for-profit or nonprofit boards, and tenure varies widely. However, term limits for a for-profit CEO who is also chairman of the board is generally governed by the retirement age of an employee. There usually are term limits for a nonexecutive chairman or lead director of a for-profit or nonprofit organization, but the length varies (commonly three years or two successive terms of three years each). “Board refreshing” and the average tenure of board members are currently under greater scrutiny by the two main proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, with these firms also further limiting the number of boards that a sitting CEO or any other director can take on.
15. Outside Oversight of Boards
For-profit boards need to knowledgeable of a number of governmental and nongovernmental organizations that oversee the companies they govern. Depending on the industry, the acronyms for government regulatory agencies read like an alphabet soup (e.g., CPSC, EPA, EEOC, FAA, FCC, FTC, ICC, NLRB, and OSHA). The banking industry wins the prize in this regard, being overseen by many of the above agencies plus the CFPB, FDIC, FRB, and OCC. In addition, the boards of publicly traded companies need to pay attention what the NYSE and NASDAQ and myriad of “buy-side” and “sell-side” investment analysts have to say, in addition to the two major proxy advisory firms mentioned previously. Nonprofit boards consider the reports of watchdog groups such as GuideStar, CharityWatch, Charity Navigator, and the Better Business Bureau. Nonprofits, especially those working in specialty areas, are subject to the oversight of regulators and international conventions (e.g., those working with and live plants or animals may work with the USDA and must adhere to CITES—the Convention on International Trade in Endangered Species of Wild Fauna and Flora).
Keys to Success
Recognizing that the success of any board is tied to the success of the entity being governed, and that external factors often influence how a board conducts its business, there are many traits common to successful for-profit and nonprofit boards. For brevity’s sake, we have omitted any discussion of board and board member legal and fiduciary responsibilities covered earlier, and we have limited our list to ten traits.
1. Successful boards never become stagnant and always carefully select new members.
Just as board members should guard against stagnation creeping into the organizations they govern, so should they be wary of stagnation in the board itself. Changing board membership is a natural and healthy occurrence. Just as a successful CEO recognizes when it is time to turn over the reigns of leadership to someone else, so do successful board members acknowledge when it is time to resign—before outliving one’s useful service or overstaying one’s welcome. Board policies, evaluations, and the actions of influential board members should all support and reinforce the benefits of board renewal. The use of “emeritus” or “life” status also can ease this process while maintaining the involvement and financial support of some nonprofit directors. When new board members are selected, care should be given to assessing the current board composition, critical skill or capability requirements, and the willingness of a prospective board member to carry out his or her board responsibilities. Adequate background and reference checks should be conducted as a matter of course, always relying on respected board member input, but never allowing the “good old boys” network to supersede proper due diligence or stand in the way of selecting a qualified candidate. It also is important to remember that the quality of the current board membership is one of the most significant factors in attracting capable new board members. In other words, just as stagnation breeds further stagnation, renewal begets further renewal.
2. Successful boards are diverse.
Diversity in the backgrounds, experiences, perspectives, and personal attributes of board members makes for richer discussions and better decisions. “Group think” is dangerous on any board, and the expression of different points of view is always healthy. A diverse board that reflects the composition of employees, customers, and other stakeholders will always be viewed favorably inside and outside the enterprise. Efforts to build diverse boards should never be shut down by a board member who says, “It is too hard to find qualified diverse candidates.” Just as renewal begets further renewal, diversity begets further diversity.
3. Successful boards clearly communicate and reinforce expectations of board members.
The best time to articulate what is expected of a board member is when a prospective board candidate is being interviewed. That discussion (including confirmation and agreement by the candidate) should be part of every selection process and should be reinforced more than once. Whether the obligations pertain to board and committee meeting attendance, preparation, and participation—or in the case of some nonprofits, expected financial support—there should be no ambiguity as to what is expected. Oblique expectations or miscommunication in this area has no upside, and it can only cause embarrassment and uncomfortable problems in the future.
4. Members of successful boards are conscientious and always meet their obligations.
Individuals assume both legal and non-legal responsibilities when they accept a position on any for-profit or nonprofit board. Board members should understand what is expected of them and then deliver on those expectations. If a prospective board member is or will become too busy to carry out his or her responsibilities, or if any disqualifying conflict of interest exists or is expected to occur, it is better to decline a board position rather than be forced to step down later. In this regard, members should plan accordingly so they can fulfill their obligations, meeting-related or otherwise. While unforeseen circumstances can occur, it is unacceptable for a board member to offer the excuse, “I didn’t know” or “I forgot.”
5. Successful boards never sacrifice the long-term health of the enterprise for short-term operating gain.
In many ways, boards of directors act as the long-term conscience and backstop for the health of the enterprises they govern. That said, board members should always consider both the more immediate and longer lasting implications of major decisions, particularly those that affect the organization’s strategy, financial soundness, culture, legal standing, or impact on stakeholders. Part and parcel to these considerations is effective risk management, including the stress testing of key assumptions and contingency planning.
6. Members of successful boards are supportive and respectful, but never afraid to challenge management and exert their fiduciary responsibility.
Boards have the dual responsibility of both supporting and questioning management. Even though the role of the CEO is lonely enough without adding an antagonistic or hostile board relationship, a board should never allow the CEO or management to act independently without appropriate oversight, or to countenance the withholding, altering, or “spinning” of important information. In situations where board members are asked to act as goodwill ambassadors or representatives of the organization, they should never usurp management’s role or overstep their bounds. In exercising its fiduciary responsibilities, a board should always retain the flexibility to form a special or ad hoc committee and to retain the services of outside experts.
7. Successful boards foster open, candid, and constructive communication among board members and with management.
No board can function effectively with out open lines of communication. All board members should be encouraged to speak up in meetings, whether to ask a question, express a point of view, or challenge a position. However, when board members address each other or members of management, it always should be done constructively and with the utmost respect. A board member also should never be afraid to ask the “dumb question” or ask for further clarification on what has been said, particularly since it is likely that someone else has the same question or may also need clarification. Even though any board member should feel free to speak his or her mind, repeating what has already been said or launching into a long-winded dissertation (business-related or otherwise) should be avoided as it wastes time and can be polarizing.
8. Successful boards understand the difference between oversight and micromanagement.
The role of any board is to oversee and govern, but not to manage operations—that is the responsibility of management. For-profit and nonprofit board members should require management to communicate important facts influencing the short- and long-term health of the institution (including action plans to address key issues and opportunities), but not to slip into the mode of doing the job of the CEO or other executives, or questioning every management decision. Effective board members understand that if they get overly involved in operating details and decisions, they run a real risk of losing perspective and foregoing the necessary checks and balances required to exercise their fiduciary duties. This, however, does not preclude any board member from drilling down on a key topic to ensure that the management team understands the issues and has done its homework.
9. Successful boards demand efficiently run board and committee meetings.
The time given from a board member or a senior member of management is precious and should never be wasted. Knowing this, it is important that the chair of the board and the chairs of the board committees efficiently plan for and conduct meetings. Since management provides staff support to board and committee meetings, the board and committee chairs should insist that preparatory work is complete and that management presentations are succinct and not simply a regurgitation of what was included in the advance materials. Proper meeting etiquette should also be expected and enforced (e.g., meetings start and end on time, participants pay attention and refrain from sidebar conversations and emailing, and speakers are not interrupted).
10. Successful boards embrace the concept of continual improvement, and they require their members to fairly evaluate the CEO and the board itself.
As discussed previously, successful organizations and boards never remain static; rather, they always strive to improve. One important step in this process is to periodically (most often annually) require board members to evaluate the CEO, the board as a whole, the various board committees on which they serve, and at times each other. It should be noted that even though the evaluation of individual board members (either self-evaluation or evaluation by peers) is considered best practice and does occur, it still is the exception rather than the rule. Recognizing that meaningful written and verbal evaluations vary in format, it is important that all evaluations are completed accurately and on time by every board member. Once the evaluations are completed, it is important for a board to review seriously the content and then formulate action plans to address improvement opportunities while building on existing areas of strength.
This topic has been the subject of many articles, each taking a slightly different approach. It’s worth reading more than one, and considering how different authors’ conclusions confirm or differ from the readers’ experience. There are 1.44 million registered nonprofit organizations in the United States and the number of for-profit institutions is far greater. Each has its own individual needs and operating style. However, one fact remains clear—as we quoted in first paragraph of this essay, “selecting the right board members and putting the right governance structure in place makes all the difference in the world.”