What are some best practices for consideration of boards in governance of nonprofits?

First, let's define some terms as used in this article: "Board" means an organization's governing board; "CEO" means the chief executive officer of an organization; "CLO means the chief legal officer of an organization; "executives" means the chief executive officers of an organization, typically the CEO, CFO and any COO and CLO; and "management" means the employed officials of an organization.

Governance, What Is It?

Governance is the aggregate of an organization's culture, methods, processes, systems and controls for:

  • Providing direction to the business, operations and other affairs of the organization (i.e., the organization's mission or purpose), and
  • Executing or carrying out that direction (including the organization mission or purpose).

Governance determines both authority and accountabilityy within the organization for the business, operations and other affairs of the organization.

Generally, the role of the board or governing body of an organization is to give direction by granting authority and setting limits, and the role of management of an organization is to execute that authority subject to those limits.

However, it is important to note that, because governance of an organization is the aggregate of many things, including its culture, what may be appropriate in terms of governance of one organization may not be appropriate for another.

Best Practices, What Are Some to Consider?

1. Build an "expertised" board

An "expertised" board is a concept described by Dana G. Mead, former chairperson of Tenneco, as part of a conference held at the Fisher College of Business of The Ohio State University on "Building Better Boards" in September 2000. An "expertised" board is composed of persons each having particular skills or expertise needed for the board to have as a whole all of the skills and expertise necessary to achieve its future objectives. This is in contrast to a "constituency" board which is composed of persons who represent the view of a particular constituency (such as the US Congress or a state legislature). Unlike a constituency board, assembling an "expertised' board requires a corporation to assess the core competencies present among its management team's members; to prioritize the additional competencies necessary for its future operations; and to recruit persons having those competencies for nomination as board members.

A major benefit of an "expertised" board is a focus on the best interest of the organization as a whole because its members are selected to bring to the table particular skills or expertise that, when taken with the skills of expertise of the other members, are to achieve the agreed best interests of the organization in the future. "Expertised" boards also avoid problems of a constituency board whose members view their duties as representing the best interest of the separate constituency that each member represents, often resulting in:

  • Partisanship similar to Congress and state legislatures
  • Decisions watered to the least common denominator
  • Favoring particular constituencies rather than the organization as a whole.

However, consider the culture of your organization before trying to implement an "expertised" board.

2. Consider Alan Greenspan's Strong CEO Form of Governance

Former Federal Reserve Chairperson, Alan Greenspan, gave a speech to the Sloan Business School that he intended as a message to Congress as it was considering legislation that eventually became the Sarbanes-Oxley Act of 2002. The message was that Congress should not expect to be able to legislate honesty and ethics, but in so doing, he described the strengths, despite corporate malfeasance, of current American form of corporate governance. According to Greenspan, the strength of the current American form of governance is of a strong CEO subject to oversight by independent directors which has outperformed

  • The European model of a shareholder board electing a management board which makes management decisions because this model has not been quick to respond; and
  • The Japanese model of a strong CEO without strong oversight by a board which has resulted in fraud and corruption.

Benefits of a strong CEO form of governance include:

  • Quick "execution" which is the function of management, subject to oversight by the board;
  • Accountability to the board of all of management through the CEO; and
  • Quick removal of management, by replacing the CEO, if something goes wrong.

However, consider the culture of your organization before trying to put in place a strong CEO form of governance.

3. Focus on Attention Using a Consent Agenda

A consent agenda is a special agenda, or portion of an agenda, for a meeting of a board or committee consisting of routine, non-controversial matters that the board or committee, because of its familiarity with the matters or knowledge, will not need to discuss before approving. The purpose of a consent agenda is to dispose of such routine matters more quickly in order to allow more time for other matters requiring discussion. The board or committee votes to approve the matters on a consent agenda in a single vote with respect to all matters unless a matter has been removed. Any director or member entitled to vote on a matter on a consent agenda may request either before or at the meeting to have the matter removed from the consent agenda and discussed. Often a consent agenda is considered at the beginning of the meeting.

Benefits of a consent agenda are that it:

  • Expedites consideration of routine and non-controversial matters; and
  • Thereby allowing the board to focus on important matters for direction.

However, consider the culture of your organization before trying to implement use of a consent agenda.

4. Meet Regularly in Executive Session with Key Management

Consider regular meetings of key management in executive session separately without other management members being present with the audit committee, but sometimes including the compensation committee and any governance or compliance committee. Regularly typically means annually at the beginning of the fiscal year, but may be more frequently.

Benefits of regular meetings with key management are that:

  • It opens communication channels between the board and key management;
  • Doing so regularly usually does not offend CEO;
  • It facilitates the board's federal and state obligations not to impede whistle blowing by encouraging communication both from employees to the board, hopefully without anonymity, and from the board to employees; and
  • Board and management will each learn from the other.

Generally, familiarity of management with the board and vice versa will not breed contempt, but foster trust and eliminate contempt.

However, consider the culture of your organization before trying to implement use of a consent agenda.

5. Know the Entire Compensation of Executives

Avoiding Intermediate Sanctions under Federal Tax Laws board members free of conflicts of interest to know, and approve, the total compensation of key managers or executives. Accordingly, at least these board members should know the entire compensation package of these key managers or executives.

Benefits of knowing the entire compensation of key management and executives include:

  • Not only avoiding Intermediate Sanctions resulting in personal liability of a board for excess compensation,
  • But also avoiding embarrassment such as that of the board of the NYSE who learned the scope of compensation of its CEO from the media.

However, consider the culture of your organization before trying to impose a process of exploring compensation of key management and executives.

6. Speak with One Voice

Boards speak with one voice or not at all, as part of their duty of care and loyalty. However, doing so does not require unanimity in decisions, but a recognition that a board speaks only as the board as determined by a majority of its members at a meeting in which a quorum is present. Unlike an officer, no individual board member in his or her capacity as such has any authority to act alone.

A board member should never take a matter on which he or she has a minority view out of the board room. The remedy of such a board member is to have his or her negative vote recorded in the minutes of the board's proceedings and, if not satisfied, to resign.

Where it is important to have a single message, a board will speak only through its chairperson or the chairperson's designee.

Benefits of speaking with one voice include:

  • Complying with corporate law that a board speaks only as a board as determined by a majority of its members at a meeting in which a quorum is present;
  • Reducing confusion from having differing views expressed; and
  • Reducing risk of liability of having matters within the board room discussed outside.

However, consider the culture of your organization before trying to force board members to speak with one voice.

7. Plan for Succession

Planning for succession is one of a board's most important duties, both for succession of board members and also for succession of management because succession is critical to the life of any organization.

Benefits of planning in advance for succession include:

  • The organization becomes multi-generational;
  • The board becomes future oriented; and
  • The board can have some assurance that emergency absences can be covered.

However, consider the culture of your organization before commencing succession planning process.

8. Knowingly Deal with Conflicts of Interest

Encourage period disclosure of all outside and other interests that might conflict with the interests of the organization because directors, especially outside directors, come with outside interests that may, from time to time, present such conflicts. Good practice is to require disclosure in writing on a instructive form at least annually and to encourage reminding the board and others of possible adverse personal and financial interests from time to time at other appropriate times.

Benefits include:

  • Decisions by disinterested directors for validity of transactions under Ohio Corporation Law;
  • Decisions free of conflict of interest to avoid Intermediate Sanctions under Federal Tax Law;
  • Oversight of financial statements and audits by independent directors to comply with auditing standards; and
  • Compliance with new Form 990 reporting requirements

However, consider the culture of your organization before requiring the board and officers to make required disclosures.

9. Encourage Questions

Directors are expected to rely upon officers and employees for matters. This expectation is evident by the fact that most states' laws limit a director's liability if he or she relies upon an officer or employee. However, under most states' laws, directors only have a right of reliance to the extent the directors have a reasonable belief that the officer or employee is competent and reliable on such matters. Courts hold that directors must ask questions to have a reasonable belief as to "reliability."

Benefits of encouraging questions include protecting outside directors from liability absent self-interest and fraud in relying upon officers and employees for matters under the direction of the board.

However, consider the culture of your organization before encouraging the board to ask questions verifying the reliability of officers or employees.

10. Don't Forget about Mentorship

Mentorship is one of the major functions of board members (the others being direction and oversight). Mentorship is making available to management each board member's skill and expertise of having been there and done it before.

Benefits of mentorship include

  • Making it less lonely at the top of management;
  • Providing coaching and fostering relationships between board members and management; and
  • Making board members and management each accessible to the other.

Some Thoughts about Culture 

The caveat throughout this article is to consider any "best practice" only in light of your organization's culture.

Culture usually cannot be changed over night. Just as it typically takes two generations of football coaches to find a successful replacement to a great coach, it takes two generations of board members to institutionalize a change: One generation initially adopts the change, but it does not become institutionalized until a succeeding generation agrees to retain it.

So, when you consider improving the practices of your organization, keep in mind it may not happen over night. You will likely have to be a steward for the practice, carrying it through to the next generation that succeeds you on the board.