Nonprofit governance

Framework for governance improvement

Whether your nonprofit organisation is an incorporated association with a management committee, or a company limited by guarantee with a board, effective governance is crucial to the organisation’s ability to function, to achieve desired outcomes and to comply with all legal, ethical and operational requirements. Governance and management are different concepts, although in small organisations it may be hard to keep them separate.

There are many definitions of corporate governance. Standards Australia gives the following example from the Australian National Audit Office:

Corporate governance generally refers to the processes by which organisations are directed, controlled and held to account. It encompasses authority, accountability, stewardship, leadership, direction and control exercised in the organization

Your organisation may not be large, but good corporate governance will help you —

  • achieve your goals
  • provide better service to clients and/or members
  • retain good directors on your board (or management committee)
  • maintain your reputation
  • support applications for funding
  • build on successes and grow
  • ensure your long term viability
  • identify systemic problems early so they can be remedied
  • prevent disaster in the form of fraudulent, dishonest or unethical conduct

The following framework is based on a model of how teams work (the model was devised by Wageman, Hackman and Lehman in 2005).

1. Defined purpose – identifying the board’s role

The nature of your nonprofit board’s role and responsibilities will depend on your organisation — the nature of its operations; its size; its lifecycle and how long it has been running; and many other factors.

Whatever role your board fulfils, it is essential that all board members and your chief executive understand what that role is. Recent research has found that “role ambiguity” has a significant effect on board members’ engagement with their organisation and commitment to their work.(1)

Discussion of the board’s role generally falls into categorising it into 3 or 4 areas:

    • Control role – this is an essential monitoring role, overseeing management’s actions in carrying out operations – generally taking a broader and longer-term view than that of management.
    • Strategy role – articulate the organisation’s mission, determine strategic direction and act as driver for strategic change
    • Resource provision role – i.e. act as essential link to key sectors of the external environment, including building relationships, representing the organisation and facilitating access to resources.
    • Service role – e.g. providing knowledge, counsel and advice to the CEO and senior management, which may include expert advice for the purposes of formulating strategy; enhancing the organisation’s reputation and representing the organisation in the community

2. Talent to task – getting the right people on board

Choosing new directors

A board is a special type of leadership team and the board’s composition affects its ability to lead the organisation. In fact some experts believe that board composition is the most important factor affecting whether or not a board will be able to carry out its functions effectively.

In the nonprofit sector, board membership is voluntary so getting the right people for the job is even more difficult. It has been found that board members themselves are more likely to view their board as effective if it has the right capabilities – i.e. a broad range of skills beyond finance and accounting. These include —

  • understanding of nonprofit management;
  • understanding of the organisation’s area of operations and client or membership base;
  • knowledge of the mission and strategic plan;
  • possession of contacts that are potentially valuable to the organisation.

A US study has shown that organisations reporting greater difficulty in recruiting new board members are also more likely to be organisations with a lower performance rating.

It is critical that every nonprofit board has effective selection processes and succession plans to attract, recruit and retain the best board or committee members. The recruitment process should be transparent and accountable to members and other stakeholders.

Effective boards are aware of the need to groom members for leadership through a process of planned succession and board member development.

See more on board recruitment and succession planning

Top Managers

Another key role for the board is choosing and replacing the chief executive or top manager. Therefore the board must also think about Chief Executive succession.

In doing that, the board must ensure a good working relationship can be maintained with the chief executive/top managers, since this relationship is critical to the board’s understanding of how the organisation is operating and its ability to carry out its monitoring or control role effectively.

3. Compelling direction – mission and strategy

Mission is the linchpin for achieving and measuring organisational effectiveness. So the way the mission is operationalised is critical to success.

  • What is our mission?
  • Does it advance our purpose?
  • Does our organisation’s culture help us achieve our mission?
  • Do our set goals align with achieving our mission?
  • Is our strategic plan focused on reaching our goals and achieving our mission?
  • Do we have the capacity needed to carry it through?
  • Do we have the support we need?
  • How do we measure achievement of our goals?
  • What are the potential risks that we won’t achieve our goals?
  • How do we manage the risks?

Ask yourself – how good is our mission statement?

  • Is it clear and concise?
  • Does it really state what we exist to do?
  • Does it accord with a vision for the long term?
  • Does it direct our strategy for carrying forward?
  • Do all board members know and understand our mission statement?
  • How long is it since we reviewed our mission statement?

Helmut Anheier quotes 5 characteristics of a good nonprofit mission statement:

  • a social contract spelling out what your organisation stands for and what it seeks to achieve – its common values, beliefs and aspirations;
  • permanence: i.e. it is adopted with a long-term vision, and won’t need changing frequently;
  • clarity: i.e. it should communicate your organisation’s purpose clearly;
  • approval by the board and your key stakeholders: i.e. it must be seen as legitimate and relevant by all as appropriate, and must also comply with all legal requirements;
  • proof: i.e. achievement of the mission is demonstrable – it can be examined and monitored according to performance and impact measures.

See Anheier (2005), Nonprofit Organizations: Theory, management, policy, Routledge, pp.176-179.

Perceptions of board effectiveness are affected by whether board members have had meaningful input into the strategic plan and it has clear indicators against which progress is measured. (Beyond Compliance Report, US Center for Effective Philanthropy)

4. Focused execution

As leaders, Boards are ultimately responsible for the health of their organisations. Good governance is essential for organisational health, and relies on sound procedures and standards of conduct.

5. Ongoing growth

Continuing Board Improvement